COVID-19 CMBS Update
Updated: Apr 23, 2020
The last week was a blur. We received so many calls from hotel owners and borrowers in distressed situations that as a business owner myself, it was very unsettling. The following thoughts are my own, compiled from many conversations with servicers, bondholders, attorneys, colleagues and friends in the industry. Here’s my summary for week two of COVID-19:
As we know, the hotel/travel industry was the first sector to feel the impact of the virus. According to a White House briefing with CEOs from the major brands, hotels are running at occupancies in the single digits to low teens worldwide, with many closing even in major markets. Their primary concerns are employees (retain or rehire) as thousands were laid off last week, and then liquidity (or how they pay their mortgage payments).
Retail is a close second. Centers with large fitness tenants and movie theatres were closed overnight. While we have seen communities rally around small business owners, restaurants and other small tenants, the reality is that continued weeks will leave many without the choice to continue.
What is critical now is that CMBS servicers are not staffed for this event and it will be weeks before they really have a response on how they will process the modifications needed. That said, one indicated that they will not (for now) be transferring the loans to special servicing and will be working with the master servicers to compile the initial requests. Initially that is positive for the borrowers as transfers to special servicing start the clock on additional fees and costs. My opinion is that no legal action against borrowers as a result of the virus will happen for at least 90 days. I don’t anticipate waivers of payments, but short-term forbearances are likely. The problem is that most of the borrowers I’m speaking to will need a minimum of six months, but most likely 12 months or more, to recover.
On the origination side, many lenders have stopped or are re-trading aggressively. Some are still quoting, but closing is unknown. This to me is similar to 2009, but many experts believe this is likely to be worse given the abrupt nature of the event and I can’t say I disagree.
Generally, most people, regardless of industry, are still in shock and don’t know what the future holds because the US event is not over. That said, Hart plans to be on the forefront of shaping the solutions now. My team and I have worked on a plan to offer a “Relief Modification”. I consulted one of the servicers and they felt it is probably the best plan that could be pursued given what we know. It will allow us to take more loans into each servicer, efficiently provide information to process the requests, and have the volume to receive responses more timely. We want to be proactive and provide the servicers the communication needed to prevent any actions that cause additional hardship for our clients.
Hart Advisors Group will provide a “Relief Modification” at a third of our normal pricing for loans with the following parameters:
Loan was performing on March 1, 2020;
The sole reason for the modification request is relief due to the impact of COVID-19;
Short Term Relief is being sought for 12 months or less in the form of:
Temporary payment forbearance;
Interest rate reductions;
Reserve waivers and releases;
Fee waivers (late charges, default interest, etc.); and,
Modifications which are required outside of the above will require additional pricing after review of the individual situation. We were a catalyst in helping borrowers through the turmoil in 2009, and we will continue to be an advocate for borrowers once again to help navigate the world of CMBS.