‘Tranche Warfare’ Finally Breaks Out at Stuy Town as Billionaire Hedge Funder Goes to Court
Eliot Brown Feb. 24, 2010, 3:54 p.m.
There’s a World War I analogy in here somewhere.
Less than two weeks old, the foreclosure of Stuyvesant Town has hit its first major bump in the road, courtesy of hedge fund Appaloosa Investment, the New Jersey-based firm that took in a reported $7 billion in profit last year.
The firm, controlled by David Tepper, filed papers in federal court Tuesday challenging the foreclosure action of the firm in charge of the mortgage, special servicer CWCapital. (The Times spotted the filing and published a piece on it Wednesday). As the representative for the bondholders of the $3 billion mortgage on the property (which was securitized, chopped up into numerous different levels, or “tranches,” and sold off to an array of different investors), CWCapital determined the best action was to foreclose on the owners, a partnership led by Tishman Speyer.
Enter Mr. Tepper, whose Appaloosa said in court papers that it bought a giant $750 million of the mortgage, a substantial piece of which was junior tranches, which would be among the earliest to be wiped out if the property is sold for less than the $3 billion initial price tag on the mortgage.
“CWCapital has recklessly and imprudently exposed the Appaloosa Intervenors—and other Certificateholders—to wholly avoidable losses, risks, and injuries,” the filing said.
Generally, in the complex world of securitized mortgages, the investors who hold the last tranche standing, so to speak—”the controlling class”—have the ability to replace or give orders to the special servicer (e.g., if the $3 billion mortgage were only valued at $2.5 billion, the investors with the riskiest $500 million piece of the mortgage would be wiped out, leaving the last tranche that wasn’t wiped out as the controlling class).
Based on the paperwork, it seems unclear if Appaloosa now has this ability, but regardless, it is upset with CWCapital.
Appaloosa presumably picked up the $750 million piece of the mortgage for far less than the sticker price given that some of it was among the risky pieces of the debt. Now it has different incentives than the more senior mortgage holders, most notably that the complex not be sold for significantly less than $3 billion (if that happened, much of its holdings would be wiped out completely, while the more senior mortgage holders would see all their money returned).
The full filing is here, but it seems Appaloosa’s main complaint is that if the complex goes into foreclosure, there will be up to $200 million in transfer taxes needed to be paid (presumably meaning the foreclosure taxes, and then another set of transfer taxes when the property is flipped to a new buyer).
It also takes on CWCapital for being conflicted, another common complaint in this complex world of distressed properties. CWCapital, according to the filing, also bought up some of the vulnerable tranches and therefore has incentive to realize a return on its investment, in addition to the obligation it has to all the bondholders.
And based on the filling, Appaloosa alleges it was shrugged off by CWCapital when it tried to suggest a different course:
When Appaloosa attempted to open substantive discussions of the profound problems associated with pursuing foreclosure, Plaintiff CW Capital’s counsel responded by offering to “write a letter for the Hall of Fame.”
(That seems like an insult, though we aren’t entirely clear what it means.)