Sector developments and company hires

Extendable CRE loans scrutinised
Fitch has published an unsolicited comment on highly extendable commercial mortgage loans that offer borrowers up to 20 years of successive annual extension options, as featured in the recent Sage AR Funding 2021 and HAUS (ELOC 39) CMBS. The agency notes that it does not treat this loan feature as credit enhancing because interest rate risk is an inherent aspect of long duration.

Such loans have no upfront interest rate hedging beyond the first maturity. Instead, each option is conditional on the borrower purchasing an extra year of interest rate cap.

“Giving rating credit to additional cash sweeps after loan extension assumes that limited-recourse borrowers would willingly purchase hedging even at considerable cost if interest rates rose,” the agency says. “Fitch does not assume borrowers offer this subsidy. Instead, we test how our high interest rate stresses affect loan recoveries.”

A series of borrower extension options may seem to ward off loan default risk, but a loan EOD is also an option, available to the lender rather than the borrower. “Highly extendable loans weaken the lender’s bargaining position by transferring this valuable optionality to the borrower. If also covenant-lite, even borrowers in negative equity can ‘buy back in’, ostensibly to begin asset repositioning or await a recovery, but possibly to extract nuisance value,” Fitch observes.

The agency further suggests that a more insidious risk arising from long duration is property obsolescence. Although both the Sage and HAUS deals could face significant refinancing risk at final loan maturity, they are secured on granular housing portfolios, offering some insulation from obsolescence risk.

In other news…

North America
Amherst has appointed a new portfolio manager to co-manage its MBS portfolio. Rahul Grover will join existing portfolio manager Eric Seasholtz as a co-leader on the MBS team, where he will be responsible for asset selection, transaction execution and risk management. Grover joins the firm from E-Trade Financial, where he served as md for portfolio management – and was responsible for the company’s fixed income portfolio, as well as being instrumental in establishing its hedging strategy.

Commercial real estate data platform CRED iQ has expanded into the operating advisory business for CMBS. As part of this expansion, the firm has hired Jim Reed and Mark McDevitt. Reed has over 15 years of asset management and workout experience at Oppenheimer and Capmark. As a senior member of KBRA, McDevitt previously led a team of analysts responsible for identifying, monitoring and valuing distressed commercial properties.

Toorak has named Kevin Chavers and Francis Byrne as the latest appointments to the board of directors, as the company continues to seek growth opportunities. Chavers will join Toorak from BlackRock, where he served as md and helped to develop the firm’s residential mortgage whole loan investing platform while working on the global fixed income securitised asset investment team. Byrne brings over 20 years of industry experience and will join the firm from Fifth Light Capital, where he was managing partner – having previously held leadership positions in securitisation at UBS, Deutsche Bank and Credit Suisse.