Recourse Debt Roils CRE-Backed Mortgage REITs

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 |  Includes: AHR, BXMT, NCT
by: Patrick Harden

Well, it took about 2 years, but the market has claimed its first major victim among the commercial real estate oriented mREITs. Anthracite Capital (AHR) formally defaulted on its unsecured debt Monday, which launched a landslide of cross-collateralization defaults and prompted the Company to warn stakeholders that

Management’s assessment of the Company’s liabilities and the current market value of the Company’s assets suggests that, in the event of a reorganization or liquidation of the Company in the near term, shareholders would not receive any value and the value received by the Company’s unsecured creditors would be minimal.

Anthracite's downfall was its on-balance sheet secured debt, which was fully recourse to the Company. As the value of the assets pledged as collateral continued to spiral downwards in 2008, Anthracite faced numerous cash-draining margin calls. Although AHR managed to get the secured lenders to agree to drop the MTM provisions triggering the margin calls in early 2009, it was too little too late. The collateral's continued to crumble throughout 2009 and ultimately the secured debt covenants were materially breached as the unsecuritized assets failed to throw off enough cash to prevent a liquidity crisis.

We've seen this before, with smaller mortgage REITs like Crystal River Capital (CYRV) and American Mortgage Acceptance Company (AMOA.PK). Anthracite, however, is the first major commercial mortgage REIT to crack, doubly embarrassing to parent BlackRock (NYSE:BLK) as it comes on the same day that BlackRock is supposed to be celebrating its acquisition of Barclays Global Investors.

Anthracite's troubles have been well-publicized, so today's announcement provided little shock to the market. Instead, commercial mortgage REIT investors are left to wonder who is next to go.

  • JER Investors Trust (OTCPK:JERT) is an obvious candidate, as it is facing a December 22 deadline to refinance its repo facility with JP Morgan (NYSE:JPM) or risk surrendering the pledged collateral.
  • Newcastle Investment (NYSE:NCT) appears to be in slightly better shape after eliminating most of its recourse debt, although the threat of CDOs failing trigger tests and trapping cash still looms large.
  • Capital Trust (CT) remains a toss-up on survival, as it still sports $500 million in outstanding repurchase facilities. The Company has met 70% of the amortization obligations necessary for its lenders to grant CT a 12-month extension, although it may ultimately turn out to be a giant extend-and-pretend exercise. With only one CDO still cash-flowing, Capital Trust may be a patient that is very slow to bleed out. The Company will need a quick turnaround in the marketplace to sell its CMBS and stay afloat.

Any other commercial mortgage REITs out there teetering on the edge?

Disclosure: Disclosure: No positions in stocks mentioned.