Commercial Mortgage Servicers Extending Maturities

For shareholders of General Growth Properties (GGWPQ) this bit of news is huge….it really is.

From Reuters:

U.S. commercial real estate mortgage servicers are seeking to extend maturing loans for up to five years in a bid to prevent borrowers from defaulting and giving up office, retail and apartment buildings at distressed levels, an industry executive said on Tuesday.

The moves by special servicers, which oversee mortgages in or near default, would sharply increase the maturity of the loans from the six- to 12-month extensions commonly negotiated today, John D’Amico, a senior managing director at Centerline Capital Group, told Reuters after a panel hosted by the Commercial Mortgage Securities Association in New York.

Modifying loans has consumed the $700 billion market for commercial mortgage securities this year. Frozen credit markets have limited refinancings for maturing loans in commercial mortgage-backed securities, resulting in a wave of defaults and exacerbating the impact of the U.S. economic recession.

Loans coming due in CMBS will grow to $42 billion in 2010 and $69 billion in 2011, from $15 billion this year, according to Credit Suisse.

So why is this such a big deal? It is an admission by the industry that market were broken AND that the best way to prevent a cascade of defaults is to materially extend maturities of current debt.

This scenario is the reason for GGP’s Chapter 11 and expected to be the very plan put forward when it files the plan of reorganization later this year. The plan stands a far better chance of acceptance by the court and will resist challenges from any dissenting groups if the plan runs in accordance with already established practices by the industry. Creditors will not be able to argue the plan is “unfair” if what is being proposed is in some form what is already being practiced.

From the article:

The loan “workout” process has often turned “nasty” as servicers try to hammer out terms agreeable to a variety of borrowers, lenders and investors that will limit losses and prevent foreclosures, a lawyer said at the CMSA conference on Monday. Among sticking points, lenders often demand borrowers put up additional equity, and the extensions add risk for CMBS investors because it delays return of their principal.

But with property prices falling and outlooks dire, parties are coming to terms with longer extensions, D’Amico said.

“I think we will see more cases where people will put more (equity) in the properties” to get extensions of up to five years, D’Amico said.

This gives even more credence to the cram-down scenario we brought up here in April. It is not by any means unreasonable to think the court will simply say that since the market is currently operating in this fashion, it is going to handle to Chapter 11 in a similar way and simply extend all debt.

A cram-down in this case that uses existing practices as a general guide would make for an expedited Chapter 11 and give a certain level of stability to a market that desperately needs it. It also is the best scenario to ensure both debtholders and stake holder are kept whole.

Disclosure (“none” means no position):Long GGWPQ