Wednesday, January 20, 2010

Tranche Warfare?

Shoddy journalism from Bloomberg goes out with a catchphrase headline of "Tranche Warfare", and then doesn't talk about Tranche Warfare at all. Honestly I just skimmed it, and wouldn't even recommend doing that, but I don't think they even describe tranche warfare or discuss it in any way. Instead, they just regurgitate stories about loans like ESH - which didn't make sense when they were done, and make references to mezzanine debt.

However embarrassed I am for the journalists involved, I've been waiting to use this image for months and months, so I'm going to waste it on this non-review of their non-story.

I'm ready to see some real tranche warfare where the special charges some nonperforming property owner 100 bps to extend their loan and push a loss off for a few years, while some front-pay investor cries foul and sues the bejeezus out of them. They should pick on LNR first - they're going down soon.


Anonymous said...

Enjoy your work.

Curious, if the front pay bonds are trading at or above par (as they mostly are now)...couldn't the bond holders just sell their bonds if they want their money back at a particular time? Why go through a whole mess of legal actions when they could simply BWIC them and be paid cash in T+3 days?

Thanks in advance,

Dark Space said...

What if you were a front-pay, or a next pay (better argument here I suppose), position that was expecting to get paid down by a big GGP loan 2 months ago, then it got extended to mature in 2016. Then all the other maturing loans get extended because they can't refinance, and you end up getting paid back 3 years down the road, about 1 year after your TALF loan is due. Then you find out the Special, LNR, is filing for bankruptcy and probably should have foreclosed on a number of loans that would have returned your cash sooner and wasn't acting in the best interest of the Trust. It's obviously worth less now. Sue? maybe a stretch.

Not the best example, though, granted. Crazy that this time last year these are nearly a thousand bps tighter than this time last year.

Anonymous said...

Thats a lot of assumptions.

When your TALF loan is due, you simply sell the bonds to pay back the loan. Risk would be if the value of the bond drops below a certain amount, which could potentially happen given certain futue rate environment assumptions.

Not only do I think the current pay bond holders dont care if loans extend since they can sell the bonds anytime, I think they might want their class to extend now.
Example: GCCFC 2005-GG3 A2, this class originally should have been paying down about now at 100 cents on the dollar, but with all the GGP exposure its extended. Given its relatively high coupon in todays rate environment, the bonds are worth about 101 cents on the dollar today.