What First Loss on AAA Bonds Since GFC Spells for CMBS Market
In late May, the CRED iQ research team conducted a thorough data analysis for the single-borrower, large loan (SBLL) segment to better understand the asset, its exposure to market risks, and loan performance within this category that is under extreme volatility.
Our readers were surprised by data showing that AAA-rated bond investors in 1740 Broadway, a loan backed by a 621,000-square-foot office building in New York City, received less than three quarters of their original investment back earlier in May. This marked the first such loss of the post-crisis era, according to Barclays. Gross sales proceeds from the distressed sale of 1740 Broadway amounted to $179.5 million ($289 a square foot), which ended up being slightly above the most recent as-is appraised value of $175 million ($282 a square foot) and significantly below its updated stabilized appraised value of $465 million ($749 a square foot). The asset originally appraised for $605 million ($1,002 a square foot) in December 2014, when the property was 98.3 percent occupied.
Special servicing workout fees, servicer advances, and other expenses totaled $62.3 million, which left only $117.2 million of net proceeds available to the A-class investors, which had an unpaid principal balance of $157.5 million. This resulted in a $40.3 million loss (25.6 percent loss severity) to the A tranche and wiped out all subordinate tranches.
CRED iQ and Commercial Observer first broke the news in March 2022 of the upcoming transfer of this loan to the special servicer as Blackstone (BX) signaled it was no longer interested in the property and would be handing the keys back. Despite common market knowledge of the degradation of value, 7 percent occupancy, and the unwillingness of Blackstone to invest in the stabilization of the building, the rating agencies maintained lofty ratings as recently as November 2023, where Morningstar DBRS had a high “A” rating and S&P had a “BB-plus” rating for the safest Class A tranche.
Are the most recent revelations an anomaly, or an indication of what is ahead for the AAA SBLL sector? Are rating agencies hesitant to downgrade their AAA-rated classes? Our analysis seeks to answer that fundamental question. We examined the overall health of current SBLL deals. Our teams then looked at some of the issues that impacted 1740 Broadway such as office sector exposure.
Office exposure
Looking more deeply into the segment, we explored the office exposure within the SBLL category. Across the entire SBLL deal universe, 152 deals have office exposure. A total of 629 office buildings are currently financed via SBLL deal structures with a total allocated loan balance of $67.5 billion.
Current state of SBLL Loans
Across the SBLL landscape, our analysis found that about 15 percent of all loans are reporting a debt service coverage ratio (DSCR) below 1.1, and 13.5 percent of SBLL loans operate at sub-breakeven DSCR levels. A few examples from CRED iQ data uncovered the Willis Tower in Chicago, which recently reported a 1.3 DSCR with 90.7 percent occupancy, and also 5 Bryant Park in New York City, which reported a 0.73 DSCR with 81.3 percent occupancy.
Stay tuned for an analysis of office buildings in distress that have not received updated appraisals.
Mike Haas is the founder and CEO of CRED iQ
