Restructuring. Re-tranching. Re-remics. Repeat?
FDIC, the regulator in charge of insuring US bank deposits, has given banks the ability to restructure commercial real estate (CRE) loans to creditworthy borrowers, without having to classify the loan as delinquent — something they would have had to have done before the workout agreement.
From HousingWire:
These [CRE] restructuring efforts include applying the concept of “good bank/bad bank” workouts to individual loans, essentially creating a good asset/bad asset scenario, according to a review of the policy by Manhattan-based asset management, advisory, and capital markets firm NewOak Capital.
NewOak managing director Andrew Akers sees the potential for institutions to use “creative retranching” to achieve this restructuring of distressed commercial loans.
So not just tranching, but creative tranching.
How would that work exactly?
Take for instance a commercial real estate loan backed by a US shopping mall. In current economic conditions that loan performance could well worsen as the mall’s tenants leave, vacancy rises and meeting mortgage obligations becomes more difficult for other tenants. At some point then, according to Akers, the bank that made or owns the loan might need to put it into non-payment status — at which point it has to hold more capital against the loan.
But under FDIC’s CRE loan workout guidelines, it could divide up the loan into a performing part and a non-performing part, instead of putting the whole thing into non-payment status. It’s a similar idea to the good bank/bad bank structure seen in the UK. The bonus is that the bank would only have to hold more capital for the risky part of the loan — thus decreasing its regulatory capital requirements.
If you’re saying wait a second — this sounds very similar to creating multi-tranche CMBS — we think you’d be right. Here’s more from HousingWire:
Another NewOak managing director, Malay Bansal, explains this loan-level retranching process as a bank splitting a commercial mortgage into an A- and B-note piece.
“You can take an existing loans that maybe got into trouble when the loan is worth $30m and the property’s only worth $25m,” Bansal tells HousingWire. “It may return to $30m at some point. There may be some value there in creating a $20m senior and $10m junior.”
Bansal adds: “You’ve taken a loan that’s underwater, close to default and problematic and split it into two – one good and one not so good.”
We’re sensing a theme here.
Related links:
The Re-Remic gimmick? – FT Alphaville
Re-remic-ing the Talf – FT Alphaville
Commercial real estate – work it out! – FT Alphaville
Banks rush to reclassify CRE mortgages – WSJ