LN-ARB

Fresh from being bought out by Starwood, LNR was recently in the news regarding risk retention in the CMBS stack. Financial Times and Debtwire did a nice job of covering LNR's stance on retaining (or selling) the B-piece in a CMBS structure.
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For the uneducated, one of  the ways LNR became great in good times (and  weak, in bad times) was through buying the first-loss portion, also known as the B-piece, in CMBS deals. The B-piece buyers are also known as the "Gatekeepers" in the securitization because since they are first exposed to losses in the trust, they get to have a say as to what assets are included.  If a particular commercial-mortgage isn't up to snuff, then the B-piece buyer gets to "kick-out" the collateral in lieu of something of better quality.
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During the euphoria that was 2007, the B-piece buyers could be counted on to keep some kind of credit standard within a CMBS deal.  The shortened version of the role of the B-piece investor is that by purchasing the riskiest component of the CMBS, they get to choose what risks they are exposed to and earn a greater yield, at the expense of being the first to absorb losses.

Look at the chart below.  Typically, LNR will buy the lower half of the middle column which includes the BB tranche, B tranche and the non-rated portion also known as the B-piece.

The FT/Debtwire article goes on to say that with Dodd-Frank's securitization retention rules on the horizon, it is unclear as to how much of the B-piece LNR would have to retain and for how long.  Back in November the WSJ covered a similar issue regarding Rialto and BlackRock.  As this class of investors is known for having "skin in the game" by being long and strong the assets in the trust, they are shrewdly selling down some of their position (The BB & B tranches, for example) while they still can:

"On a notional basis that’s equivalent to about a 7% stake of a new deal. But recently, the BB portion (about 2% of the 7%) has been offloaded into a more liquid secondary market at roughly 8% yields, according to the buysider, a CMBS dealer and a trader.

Put another way, on a cash basis, given the discounted level B-piece buyers pay for their risky bonds, some buyers have retained only the equivalent of about 1% to 1.5% of CMBS deals after stripping away BBs. In doing so, they’ve recouped a major portion of their initial investment, the buysider said."

It's understandable that proponents of the CMBS market would want the league of extraordinary B-piece buyers to match their interests with that of the other investors in the securitization but as long as Dodd-Frank leave this loophole open, then others will keep on driving a truck through it.

*Here is the presale for GSMS 2013-GC10 by S&P, of which LNR bought the E(BB), F(B), G(NR) and R(NR) tranches.  
*Not for the faint of heart: The GSMS 2003-GC10 Prospectus*

Servicers Unite

Starwood is buying LNR for an undisclosed sum with 3 commas:

Barry Sternlicht's Starwood Capital Group has agreed to buy LNR Property LLC, a large player in the distressed-commercial-property market, for more than $1 billion, according to two people knowledgeable of the deal.

and, Ocwen won the bankruptcy bid for ResCap:

Ocwen will take over ResCap's business (subject to the pending approval), which includes the rights to serve nearly 2.4 million mortgages with an outstanding value of $374 billion. The company faced a serious competition from Nationstar Mortgage Holdings Inc. ( NSM ) at the ResCap bankruptcy auction in New York. Nationstar acted as the stalking horse bidder for the auction. For this, Ocwen will pay Nationstar a break-up fee of $24 million, which was included in its final bid amount.

Higher foreclosure rates coming to an RMBS near you.

Five Mile takes another bite at Innkeepers USA

The WSJ reports:

Five Mile submitted a preliminary nonbinding offer for Innkeepers earlier this week to acquire its 64 remaining hotels, the people said. The offer is slightly higher than an opening bid Five Mile and Lehman made for Innkeepers in a May bankruptcy-court auction. Since then, the two sides have been negotiating terms. The deal consists mostly of assumed debt and converting debt to equity, the people said.

Under the broad contours of the proposed deal, Five Mile would assume a substantial portion of Innkeepers's senior mortgage debt and, along with investment partners, make certain cash payments to creditors.

Those investment partners are Starwood Capital Group and Hersha Hospitality Management, which both would end up owning a piece of Innkeepers, people familiar with the matter said. Hersha, a hotel-management company partially owned by Starwood, would manage the properties for the ownership group, one of the people said.

Lehman would convert a chunk of its mortgage debt to ownership stakes in Innkeepers. Some of the remaining mortgage debt would be paid back, people familiar with the matter said.

Overall, the assumed debt, conversion of Lehman debt to equity and other cash contributions bring the value of the deal to more than $1 billion, the people said.

Timeline:

* Innkeepers Keeps Chapter 11 Control 9/14/2011
* Innkeepers, Cerberus Spar 9/1/2011
* Innkeepers Sues Cerberus 8/30/2011
* Innkeepers in Escrow Fight 8/24/2011
* Cerberus Puts Off Closing Innkeepers Deal 8/17/2011

And the winner is...

The Starwood investor group—including TPG and Five Mile Capital Partners LLC—is proposing to put in more than $600 million in new equity, the people said. The rival plan had proposed as much as a $450 million investment from Centerbridge and Paulson.

But what will happen to the gargantuan $4.1b CMBS loan?

The Starwood proposal also calls for some of the existing holders of Extended Stay's $4.1 billion first mortgage debt to continue holding their debt, known in financial circles as "rolling" their positions.

extend, and ...

The Starwood-led plan puts a higher value—nearly $4 billion—on Extended Stay than other estimates that have emerged during the process, according to people familiar with the situation. Upon its bankruptcy filing, the company estimated its value at $3.3 billion. The company's financial advisers have pegged its value to be about $2.8 billion to $3.6 billion.

pretend.

It's not over yet, though

To be sure, the Starwood-led plan is still far from a done deal as Centerbridge and Paulson could increase their bid and other bidders also could emerge, the people said. And the plan still needs to be approved by the bankruptcy court.

Extended Stay's Stay of Execution

Judge Peck extended the bankrupcty filing deadline to April 2nd.

According to Richard Parkus at DB, Centerbridge and Paulson are injecting $400mm in cash (200 equity/200 rights), and they want to bring on Doug Geoga to represent them on the board. Further, they're ready to pull the trigger immediately.

This may turn into a real issue with Starwood who bought the mezzanine debt, and subordinate bonds off the CMBS (G and H), and has been in much longer negotiations to take over the chain. They've publicly accused ESH of misleading them. Their reorg plan calls for making payments to the CMBS holders (who all are not receiving any interest right now, btw), amongst other things. They may well get a big slap in the face for their efforts to buy the debt, get a controlling position, receive no income on the debt purchase, pay a consultant, and then not get anything for it.

I'm on the road traveling, so don't quote me on the information below that ise based on memory alone!!!

For those without the full history, this is one of those loans (similar to PCV/ST) that everyone scratched their head on when it was first issued. It didn't make sense then, and it's fitting that it is one of the first to fail. Blackstone bought the chain in 2004 for something like $4 billion, and financed it through a loan that ultimately ended up in a Bear Stearns deal. Then, just 2 or 3 short years later, Blackstone flipped it to Lightstone, for TWICE as much ($8 billion). Lightstone is quite possibly the worst real estate investment vehicle ever created - the guy that runs it bought at the top, used the most leverage, and overpaid on top of that, and he did it over, and over, and over again.

So, Lightstone called up their buddy at Wachovia (whose name rhymes with varoom, kind of) and put together a great debt package including a CMBS component and mezzanine debt. Lichenstein (the dolt who runs Lightstone) even got on the hook for a $100mm personal recourse carveout when the loan went into bankruptcy. Of course he figured out a way to get out of this by getting an indemnification from some of the bondholders, which smelled a little funny and he must have used some sort of voodoo to get this in place.

Starwood stepped in and has effectively offered to buy them for $3.5billion. But that brings us back to the start of this article.