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By Joy Wiltermuth
NEW YORK, June 20 (IFR) - Mission Peak Capital has pulled
off what big-name distressed debt shops have been itching to do
since the financial crisis - snap up a soured loan on a
high-profile property at a discount from a CMBS trust.
The Kansas City-based boutique firm bought the debt on New
York City's landmark Bryant Park Hotel - a US$85m loan, bundled
into a 2007 JP Morgan securitization, that defaulted.
But the shock is that it paid just US$65m for the loan,
using the so-called "fair value purchase option," a person
familiar with the matter said.
That was significantly below the property's last value
assessment of US$71m published by special servicer Key Bank as
recently as February.
Mission Peak used its right as the controlling class
investor to buy a defaulted loan out of the trust before anyone
else - a provision that has been scrapped since the financial
crisis but exists in many legacy CMBS deals.
Now market participants are up in arms, because they believe
Key Bank should have insisted on a higher sale price.
"New York hotels are in great demand," said one lender
familiar with the property. "Why did this happen?"
In most cases, the controlling class is the special
servicer, hired by bondholders to service loans in the trust to
get them the best deal.
With the loan sold to Mission Peak at a nominal US$20m
discount, holders of the JP Morgan securitization - a deal
officially known as JPMCC 2007-CB18 - will take a loss.
Barclays analysts estimate the loss to be US$25.7m,
including the discounted sale and related costs.
THOSE IN THE KNOW
Documents show that Mission Peak didn't act alone.
New York real estate investor Philip Pilevsky, the borrower
who defaulted on the Bryant Park hotel, took out a new US$85.58m
mortgage from Mission Peak in the days leading up to the
finalization of the fair value sale, according to public
That loan was immediately split into a US$66m A portion,
which Bank of China bought at par, and a subordinate US$19.6m B
note. This so far has stayed between the parties, but is
structured as a "hope note" that may not ever be repaid.
So in the end, Mission Peak got its discounted loan purchase
and the borrower wound up with a lower-rate mortgage. All the
while, Key Bank said, it was kept in the dark about the deal.
"The resulting liquidation was not a resolution strategy
chosen by the special servicer. Rather it was the [controlling
class holder's] election to exercise its contractually granted
purchase option," said Meade Hubby, the special servicer at Key
Bank who oversaw the loan on behalf of the CMBS trust.
"As the controlling class they were undoubtedly aided by
inside knowledge," Shlomo Chopp, managing partner at Case
Property Services, a distressed debt advisory firm, told IFR.
"I don't believe they did anything wrong - it's as simple as
dealmakers capitalizing on the limitations of special servicers
on these sort of workouts."
But because they acted on this, Chopp said, and realized
profit at the controlling class level - as opposed to
distributions to the trust's upper classes - senior bondholders
will likely be more than a little unhappy with the deal.
"The same day purchase, workout and flip of the loan can't
sit well," Chopp said.
(Reporting by Joy Wiltermuth; Editing by Anil Mayre, Marc
Carnegie and Natalie Harrison)