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Wednesday, January 21, 2009

Tranche Warfare

by Calculated Risk on 1/21/2009 11:25:00 AM

From the WSJ: Hancock at Center of 'Tranche Warfare' (hat tip Rich in SF)

Earlier this month, a Broadway fund defaulted on $700 million of debt tied to the Hancock tower and other buildings. The default triggered a scramble among investors holding debt tied to the acquisition, with some pushing for immediate foreclosure and others pushing to extend the loan in hopes of a real-estate rebound.
The disputed $700 million of debt in the Hancock battle is mezzanine debt that was divided up among nine investors. With real-estate values declining, not all of the investors would be paid off in a liquidation.

As a result, investors who believe they would be in the money are pressing for an immediate foreclosure ... Investors likely to lose out in foreclosure want to give Broadway more time to repay the loan.
The servicing agreement usually details what is supposed to happen in default, but many of these agreements haven't been tested before. Clearly holders of different tranches of debt have very different interests.

And, oh, on the vacancy rate:
[T]he vacancy rate in the John Hancock Tower has risen from practically zero to 15%.
I bet the investors didn't include that scenario in their pro forma analysis!