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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.
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 mortgage files.
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)