The motivations of special servicers within the CMBS ecosystem can sometimes be counterintuitive. There are several reasons why a CMBS special servicer might be reluctant to offer discounted payoffs (DPOs) to loans in distress:
Fiduciary Duty to Bondholders
Special servicers have a fiduciary duty to maximize recovery for bondholders. A discounted payoff may not always be seen as the best way to maximize recovery. For example, if a property is believed to be temporarily undervalued or if market conditions are expected to improve, holding the loan or restructuring it without a discount might yield a better recovery in the long run.
Waterfall Payments
CMBS trusts are structured so that payments are made in a specific order, or “waterfall”, to various tranches of bondholders. This structure can affect the incentives and decisions of servicers. A DPO might benefit the more junior tranches at the expense of the senior tranches, or vice versa. Thus, it might not be in the best interest of all bondholders.
Control Rights and Fees
Special servicers can earn fees and additional compensation from managing and working out distressed loans. If a loan is quickly resolved via a DPO, the special servicer might earn fewer fees than if they took the time to work it out or manage the property until sale.
Loss Severity
In some cases, accepting a DPO might result in a recognized loss that is higher than what would be expected by extending the loan or seeking another workout solution.
Precedent Setting
If a special servicer routinely accepts discounted payoffs, this might set a precedent and incentivize other borrowers to seek similar concessions, even if they’re not in as much distress.
Rescue Capital
In recent years, there have been more third-party “rescue capital” providers willing to buy out or recapitalize distressed CMBS loans. Special servicers might anticipate that another party could step in and provide better recovery than a DPO would offer.
External Pressures
Special servicers might face pressures from rating agencies, bondholders, or other stakeholders to act in certain ways, which could influence their decision on whether to accept a DPO.
Valuation Discrepancies
Sometimes the borrower and the servicer might have different views on the underlying value of the collateral. This could lead to disagreements about what constitutes a fair discount in a payoff.
Potential Legal Concerns
There could be legal restrictions or consequences associated with accepting a DPO that the special servicer wants to avoid.
How to obtain a DPO
It’s essential to remember that each distressed loan situation is unique. While the above are general reasons why a CMBS special servicer might be reluctant to offer DPOs, the specific circumstances surrounding a particular loan could influence the servicer’s decision in a number of ways.
Having an experienced CMBS loan Advisor with deep insight into the various special servicers allows the Borrower and their Counsel to identify potential roadblocks and find creative solutions for our clients looking for DPO’s, Modifications, or Extensions on their CMBS loan.
