NEW YORK--()--Increased issuance volume is bringing several new B-piece buyers to the U.S. CMBS market - but in the new normal, B-piece buyers are not specially servicing these deals, according to Fitch Ratings.
Of the 81 transactions issued in 2012 (totaling $66.6 billion), absent from the B-Piece market were the so called 'old cartel' of special servicers made up of LNR Partners, CWCapital, and C-III. These firms still retain significant interest and market share in older vintage CMBS, though they have been replaced by new entrants. Among them include Rialto, Eightfold Real Estate Capital, Raith Capital Management and Blackrock who were the largest buyers of CMBS B-pieces in 2012.
While Fitch has seen significant interest in special servicer ratings recently and assigned five new ratings last year, only Rialto was actively buying B-Pieces. Of the new servicers, each has a different platform and market focus. Two have significant CMBS positions, two are servicing non-performing transactions, one is a CDO manager and large loan special servicer, and one is a GSE (Freddie Mac). Fitch believes the continued growth in CMBS issuance supports a broader range of special servicers.
Fitch's criteria for rating special servicers are not predicated on the size of a company's special servicing portfolio. Instead, Fitch assesses the special servicer's ability to manage distressed commercial real estate loans. Fitch also considers a special servicer's financial strength, internal controls, staff workout experience and technology. While Fitch receives a great deal of interest from companies looking to be rated, only well-established companies with proven workout experience meet its rating standards. As a result, not all companies meet Fitch's criteria.
Fitch expects continued interest in special servicer ratings and to a lesser degree primary servicer ratings in 2013. Master servicing has consolidated with four commercial banks and Berkadia pursing new master servicing assignment. As such, the highly competitive bidding environment for master servicing and significant infrastructure needed makes new entrants unlikely.
Special servicers rated by Fitch in the last 12 months are:
--Freddie Mac (CMBS special servicer rating 'CSS2-'):
Freddie Mac does not currently special service CMBS transactions. However, its multifamily asset management and operations group is responsible for the surveillance and workout of Freddie Mac's portfolio of more than 8,800 multifamily loans and loans underlying Freddie Mac's financial guarantees (representing $94 billion as of Sept. 30, 2012). The group has extensive experience in multifamily housing across the U.S.
--Rialto Capital Advisors, LLC (RCA; CMBS special servicer rating 'CSS2-'):
RCA is the operating entity that performs special servicing and asset management for Rialto Capital Management (Rialto). Rialto was founded in 2007 by the former cofounders of LNR Property Corporation (now LNR Partners, LLC) and is a real estate investment and management company focused on distressed real estate assets. As of June 30, 2012, RCA's active special servicing portfolio consisted of more than 8,000 loans totaling $4.4 billion of UPB. This includes 3,005 REO assets representing more than $2.1 billion UPB. About 63% of the loans by UPB were on vacant land or residential properties (81% by loan count). RCA has purchased B-pieces in 16 CMBS transactions as of year-end 2012.
--Sabal Financial Group, L.P. (Sabal; CMBS special servicer rating 'CSS3'):
Sabal was established in 2009 by the founder of IndyMac Commercial Lending Corporation. Sabal is a financial services company with three primary business lines: credit advisory services, loan portfolio investments, and real estate lending. Sabal services acquired portfolios of distressed and performing assets for funds of Oaktree Capital, which owns a significant non-controlling equity stake in Sabal. Sabal was recently named asset manager for the ORES Series 2012-LV1 non-performing loan transaction.
--Strategic Asset Services, LLC (SAS; CMBS special servicer rating 'CSS3'):
SAS was formed to manage the commercial real estate assets of H/2 Capital Partners (H/2) and other third parties. While independent of H/2, SAS is related through common ownership and shared resources. As of Sept. 30, 2012, SAS was named special servicer on 48 non-CMBS commercial mortgage loans. The unpaid principal balance (UPB) on these loans is $5.1 billion. Of this amount, there are nine actively special serviced loans with a UPB of $1.3 billion and two REO assets with a UPB of $117.1 million. SAS expects to be appointed by H/2 as special servicer on additional CMBS loans and transactions, for which H/2 is the controlling class representative. SAS, through its predecessor company, has been providing primary and special servicing for commercial real estate since 2003.
--Urdang Capital Management, Inc. (UCM; CMBS large loan special servicer rating 'CLLSS3+'):
UCM was founded in 1987 to provide real estate investment management services to institutional investors. In February 2006, UCM was acquired by the Bank of New York and is a wholly-owned subsidiary of BNY Mellon. UCM has invested and managed over $6.7 billion of institutional-quality commercial real estate properties. UCM also established its first separate account relationship in 1988 and launched two commingled funds in 2003 and 2008. Additionally, UCM was appointed as investment advisor for the Capmark VII CDO in 2009. Concurrent with the assignment of the CLLSS rating, UCM is expected to name itself as special servicer for the loans in this transaction.
Fitch rates special servicers, which are key to effectively monitoring, working out, and disposing of distressed commercial mortgages and real estate-owned assets.
In assessing the capabilities of special servicers, Fitch reviews several key factors, including the nature of its serviced portfolio, the management team and staffing, internal controls, and conflicts on interest, operating history, financial condition, information systems, as well as workout and asset disposition experience and strategies. While focused on CMBS, Fitch considers its entire special servicing capabilities.
Fitch rates commercial mortgage primary, master, and special servicers on a scale of 1 to 5, with 1 being the highest rating. Within each of these rating levels, Fitch further differentiates ratings by plus (+) and minus (-) as well as the flat rating.
Additional information is available at 'www.fitchratings.com'.