Crunched Credit

Subscribe to Crunched Credit's Posts

It is time to start originating Single Asset Single Borrower (SASB) large loans priced on SOFR.  There, I said it.  Not just LIBOR indexed loans containing a SOFR fall back when LIBOR inevitably goes away, but new loans indexed to Compounded SOFR, implementing all the necessary tweaks to documents, systems and processes to make that work now!
Continue Reading It’s Time to Originate a SOFR Loan! Really!

Last week, the U.S. Department of the Treasury released proposed rules providing tax guidance around various LIBOR replacement issues.  Long anticipated.  The defenestration of LIBOR will leave considerable broken glass in its wake.  Perhaps just so the tax professionals wouldn’t feel left out, the end of LIBOR will create a series of tax problems.  Very briefly, changing the price index of a loan, and certainly a mortgage loan, might be a significant modification under the so-called 1001 Rules.  The result of that?  Without a fix from our friends at the IRS, that change may be deemed an exchange of an old financial asset for a new one, creating potential gain or loss, violating the REMIC requirement that pools be static and violating the provisions of the REMIC rules.  Obviously, those adverse consequences under the tax code were not intended by anyone and it would seem that we ought to get a simple fix.  Changing the index is not a significant modification and therefore none of the other follow-on bad things happen.  The end.

While, as we’re sure everyone knows, it’s not that simple and the IRS, instead of saying, “you got it fellas, we’re good,” has given us 50 pages of new regulatory code speak. We suggest that you read our OnPoint and we certainly invite you to read the release, which is subject now to public comment, because it is critically important that we get this right.  Here’s a spoiler alert, while the proposed rules basically work, they do create problems and issues which we urge the industry to address to see if we can get this right before the proposed rules go into effect.Continue Reading Proposed Tax Rules on LIBOR Replacements Answer Some (But Not All) Questions

The LIBOR transition process is an affair of headache-inducing complexity.  Amidst the thousands of gallons of ink spilled on the subject, we thought it might be useful, from time to time, to give you some important information in  bite-sized servings (don’t worry, we will continue to publish lengthy, irreverent commentaries on the subject that our long-time readers have come to expect).  So here’s your first Quick Note.  What will the Alternative Reference Rates Committee (“ARRC”) recommend for the spread adjustment?
Continue Reading Quick Note: What Will the ARRC Recommend for the Spread Adjustment?

The annual June CREFC conference at the Marriott Marquis in New York City was slightly less well attended than Miami (well, no duh!), but low conference attendance and stormy weather didn’t stop over 400 people from attending Dechert’s annual party at the Knickerbocker. The market outlook from the commercial real estate finance crowd this year – perhaps – was remarkably positive given where we are in the cycle. Were we all trying to convince each other, or ourselves? Any unusual anxiety could, of course, be due to the thick fog and heavy rain but the conference itself felt a bit darker than in prior years because there are reasons for anxiety, right? This year, in addition to the tired sports analogies (how many 9th innings can there be?), there were multiple references to driving a car directly into a wall. That’s dark, man.
Continue Reading CREFC June 2019

A recent decision out of the District Court for the Southern District of New York may bring greater certainty to the interpretation of what constitutes a “financial institution” in connection with the safe harbor in section 546(e) of the bankruptcy code. The decision, In re Tribune Fraudulent Conveyance Litig., 2019 U.S. Dist. Lexis 69081…

Note: This was republished on June 6, 2019 to reflect factual updates.

Sutton 58 Associates LLC v. Pilevsky et al., is a New York case which gets to the heart of the enforceability of classic single-purpose entity restrictions in commercial real estate lending.  At issue is how far a third-party may go to cause a violation of a borrower’s SPE covenants, and whether those covenants are enforceable at all.

A Defaulted Construction Loan and Frustrated Attempts to Foreclose:

Sutton 58 is a case involving a defaulted New York City construction loan consisting of mortgage and mezzanine debt provided by Gamma Real Estate.  After a maturity default, Gamma’s attempt to foreclose on its equity collateral through a UCC foreclosure sale was hindered by the bankruptcy filings of the mortgage borrower and mezzanine borrower.

The borrowers were established as single-purpose bankruptcy-remote vehicles but subsequently acquired additional assets from one of the defendants (Sutton Opportunity), and took on debt from Prime Alliance (another one of the defendants – both controlled by the individual Pilevsky family defendants).  Sutton Opportunity obtained a 49% indirect stake in each borrower as a result of the asset transfer.  The additional assets and debt destroyed each borrower’s status as a “Single Asset Real Estate” entity under the Bankruptcy Code (or “SPE”), and allowed both entities to file a petition for bankruptcy.  Both the transfer of assets and the transfer of indirect equity interests in each borrower violated separateness covenants in the mortgage and mezzanine loan documents.Continue Reading “Nobody Fell Off the Turnip Truck Yesterday”: What’s at Stake for Commercial Real Estate Lenders in Sutton 58?

Last year, a California Bankruptcy Court wiped out $10.2 million in default interest (“DRI”) when it ruled that a 5% DRI was an unenforceable penalty in a Chapter 11 bankruptcy case where the construction lender fully recovered principal, interest, and other costs of collection. In acting as the borrower’s fairy godmother, the Court noted that the 5% DRI, an industry standard for construction loans, was unreasonable because it was not negotiated in detail at origination and because it did not adequately forecast the lender’s anticipated costs and damages. So much for considering prevailing practices when gauging reasonableness! The court’s decision also hinged on the fact that the lender was able to collect exit fees, late fees, and loan extension fees while the loan was in forbearance. In the court’s opinion, such fees already compensated the lender for the costs associated with the default.  Now that’s novel!  We sort of thought that lenders collected exit fees, late fees and loan extension fees in consideration of other things the lender did or forbore from doing.  Silly us.
Continue Reading A Survival Guide for Winning Default Rate Interest in Courtroom Battles

God help me, I’m finally writing about climate change.  This commentary assiduously avoids the obviously political (we take the view that complaining about and belittling our elected representatives and the permanent bureaucracy for doing boneheaded things is entirely apolitical).  And while even the phrase “climate change” carries with it a certain frisson of a capital “P” political debate, this is not that.  So, please, don’t ball this missive up, toss it away and cancel your subscription to Crunched Credit if you’re (A) not a fully-enrolled initiate in the Green Revolution, or indeed, even, if you are someone who thinks that the threat of climate change is somewhat… overblown (I’m not even going to think about using the term “climate denier”) or (B) someone who thinks climate change is real but simply throws your arms up in frustration over the possibility of finding a possibly affordable fix.

In either of those cases, I expect your default response to climate change talk is simply to move on to something more actionable in your professional life and I’m going to suggest here why you shouldn’t do that.  We need to start paying more attention than I have paid to date.Continue Reading Commercial Real Estate and Climate Change

As we return to our desks after last week’s whirlwind in Las Vegas for the Structured Finance Industry Group (SFIG) Conference, we find ourselves reflecting on how this conference was at once business as usual while also showing evidence of an evolving industry looking to the future. Approximately 8,050 attendees, including a sizable Dechert team, gathered last week at the Aria to discuss past, present and future and to put our heads together to ask “where do we go from here?”
Continue Reading SFIG Vegas 2019

Last week, an estimated gathering of over 4,700 of the industry’s finest descended on Miami for IMN’s ABS East conference. The mood was upbeat and the meeting rooms (and the lobby bar) were crowded, as participants raced to fit in as many meetings as possible. If there was one overall takeaway from the conference, it was that there is a lot of money looking to invest in the ABS sector, which continues to enjoy strong fundamentals and a hearty appetite for deal making. We are excited to see all the term sheets that come out of this conference and help get some of those deals closed.
Continue Reading IMN 2018 ABS East Conference