It was like salt in the wound for investors in defaulted real estate bonds who’d been waiting four years to get their money back.
The investors were seeking to recoup money from a pair of German office buildings tied to 412 million euros ($486 million) of commercial mortgage bonds. Then they discovered a problem: while they did have a claim on the buildings, the stairs, elevators and fixtures inside those properties had been pledged to someone else.
The peculiar arrangement is complicating administrators’ efforts to seize the properties to sell and repay bondholders. It’s another example of how pre-crisis commercial mortgage-backed securities continue to inflict pain a decade after the collapse of the market that financed everything from Paris skyscrapers to shopping centers near Florence. Fighting over soured deals has damped investor appetite for new transactions and prevented a revival of the 36 billion-euro CMBS market in Europe.
“I’ve come across funny things in CMBS, but I don’t understand how the transfer of certain fixtures could happen,” said Solveig Loretz, a former Morgan Stanley securitization banker who advises on structured finance transactions at Solo & Partners Ltd. in London. “If the documents are written properly, then when you gain security over a building it’s security over everything attached to it.”
Europe’s CMBS market has shrunk 35 percent in the past three years as investors, bankers and loan managers wrangle over old deals that fell apart. A collapse in real estate values during the crisis exposed cracks in many structures, left loans underwater and led to bitter legal battles.
The problem bonds were unusual, even by pre-crisis standards. In January 2006, Credit Suisse Group AG lent 73 million euros to finance two commercial buildings near Hanover, Germany and six offices in Belgium. The loan was known as Monnet and bundled with 17 others, which financed properties from Saint-Tropez to The Hague, into bonds called Titan Europe 2006-3 that were sold to investors in June of that year.
Monnet was structured so that each of the eight underlying properties was owned by a separate company — a common arrangement in pre-crisis CMBS. But in a twist, an altogether different company took control of the German buildings’ fixtures in December 2006, according to Mount Street LLP, which administers the loan.
The lifts, machines and equipment became the property of Monnet Maintenance GmbH, while the offices themselves continued belonging to the original owners. That split has delayed Mount Street from seizing control of the properties, which are occupied by Siemens AG and a technology services company.
“Enforcing on a piece of real estate where basic fixtures are owned by someone else is likely to be difficult,” said Anant Ramgarhia, a London-based senior investment analyst at Wells Fargo Asset Management. “This may shrink the potential pool of buyers for that particular property and make the potential borrower demand a meaningful discount on the purchase price, which in turn will reduce recoveries for noteholders.”
The delay in liquidating assets is costing bondholders. Last month, a 6 million-euro portion of the senior ranking notes in Titan Europe 2006-3 changed hands at 68 cents on the euro, according to a trader with knowledge of the prices. A year ago they traded at about 90 cents, the trader said.
Servicers have been trying to recover funds since 2009, when Monnet breached covenants. The loan wasn’t repaid at maturity in 2012 and Titan Europe 2006-3 defaulted in 2013. Mount Street has administered the loan since November 2015, when it took over from Hatfield Philips International Ltd., which was acquired by Situs Group LLC last year.
The specifics about why and by whom the German office fixtures were carved out aren’t publicly available. Mount Street, Situs and Mayfield Asset & Property Management Ltd., which manages the properties, declined to identify the borrower or the rationale for the split.
The Monnet borrowers were three unidentified private limited liability companies incorporated under the laws of Gibraltar and two in Germany, according to the CMBS prospectus. The borrower instigated the transfer for tax benefits, according to people familiar with the matter, who asked not to be identified because they’re not authorized to talk about it.
Mount Street released some information this week, when it told bondholders that it asked its lawyers if the division of ownership prevented it from seizing control of the properties. The lawyers said it’s “highly likely” that physically present items are enforceable, although Monnet Maintenance GmbH may have an ownership claim.
“Bondholder value is eroded the longer the bonds are outstanding,” said Aaron Baker, a London-based credit analyst at Banco Bilbao Vizcaya Argentaria SA. “It can become a brinkmanship game where the special servicer has to negotiate with the owner of the fixtures.”