KBRA Releases Research ? Workout Fees Lurking in CMBS Waterfalls

KBRA releases research that identifies workout fees in U.S. commercial mortgage-backed security (CMBS) waterfalls.

When a special servicer returns a loan to the master servicer, the special servicer is typically entitled to receive a workout fee equivalent to up to 1% of all future payments received on that loan, up through and including the balloon payment. On any given month and on receipt of monthly principal and interest payments from such loans (which are generally referred to as corrected loans), the 1% fee is generally withdrawn from collections to pay the special servicer. The withdrawal effectively reduces the available distribution to certificateholders, resulting in interest shortfalls that impact the certificates in reverse sequential order.

While such shortfalls impact the most subordinate certificates and can be relatively small?based on monthly principal and interest payments?the workout fee applicable to the balloon payment is larger and can impact certificates that are positioned much higher in the capital stack. This is especially true for transactions with larger balance corrected loans or where multiple corrected loans pay-off simultaneously. Notably, the corrected loan workout fee is generally reduced by any modification fee the special servicer may have collected from the borrower to correct the loan.

In this report, we analyzed outstanding CMBS 2.0 conduits to better understand the magnitude of corrected loans and the potential impact on CMBS transactions, given the effect workout fees can have on available distributions to certificateholders. In total, we found almost $7 billion in corrected loans across 193 of the 490 CMBS 2.0 conduits (both KBRA- and non-KBRA rated) that currently incur ongoing workout fees. While the $7 billion is spread across many transactions, there are nine conduits that each have over $100 million in corrected loans that are incurring ongoing workout fees and 47 that each have exposure to more than $50 million of such loans.

Key Takeaways

• Most of the corrected loans were specially serviced due to circumstances surrounding the COVID-19 pandemic. Of all the loans that were corrected 91.5% were initially transferred to the special servicer in 2020 and 2021.
• There was a total of $20.1 billion in corrected loans (786 by loan count). To the credit of special servicers, a majority of these loans (55.7% by loan count and 65.9% by balance) were transferred back to master servicer without an ongoing workout fee being charged to the trust, leaving $6.9 billion corrected loans that are currently subject to the ongoing fees.
• Lodging (48.9%) and retail (34.8%) make up an overwhelming majority of the corrected loans with workout fees.
• The longer the loan remained with the special servicer prior to being returned to the master servicer, the higher the likelihood that a workout fee was assessed from trust cashflows. Of the corrected loans that were with the special servicer for six months or less, only 19.1% have an ongoing workout fee compared to 39.6% for corrected loans that have been with the special servicer for longer than six months.
• Special servicers affiliated with b-buyers generally collect a workout fee on a higher proportion of corrected loans (48.9%) compared to third-party special servicers (30.7%).

Click here to view the report.

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About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA's ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.