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Bondholders at odds over role of special servicers

Special servicers have an unenviable task in the distressed CMBS market: keeping everybody happy. “In the absence of a liquidity event the special servicer is in control. Without a clear mandate for unilateral action, creative solutions are key to achieving a restructuring,” says Nigel Das, director at Rothschild.

In any CMBS deal the bonds have a legal final maturity and the loan has a legal final maturity and the two will be different. It is the special servicer’s job to maximize recoveries for all bondholders until the legal final maturity of the notes, upon which that mandate passes to the senior bondholders. The structures also incorporate an operating adviser, which has no rights or powers other than consultation rights – this is usually the junior noteholder.

Senior bondholders are increasingly frustrated by junior noteholders’ ability to extend the life of distressed CMBS structures but they do not have the right to insist on enforcement. "Senior bondholders have limited rights to enforce before the legal final maturity of the bonds," says Ravi Stickney, partner at Cheyne Capital Management in London. But enforcement does happen: a securitization vehicle backed by a loan to the Leadenhall Triangle site in the City of London was put into administration in November last year by special servicer Hatfield Phillips when agreement could not be reached over the size of an equity injection by shareholders. But this has been the exception rather than the rule and the process can be expensive – as much as £400,000 just to enter administration.

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