In a surprising turn of events, the commercial mortgage-backed securities market is facing a unique risk after investors, including TPG Angelo Gordon, LibreMax Capital, and Lord Abbett & Co., discovered a missing $164 million related to a bond deal arranged by Goldman Sachs Group Inc. This revelation highlights an unusual holdback scenario, sparking concerns among investors in the $1 trillion market for commercial mortgage-backed securities.
The bond deal, arranged in 2021 by Goldman Sachs, financed the acquisition of numerous apartment buildings in San Francisco. However, by the end of 2022, the borrowers had defaulted, leading to the sale of the loan at a substantial loss. Midland Loan Services Inc, acting as an intermediary for bondholders, then delivered the unexpected news that investors would not receive the $164 million owed to them for the time being.
The holdback, an unusual occurrence in commercial mortgage bonds, has raised eyebrows on Wall Street, introducing a potential X-factor risk amid the ongoing historic downturn in the real estate market. Stav Gaon, a strategist at Academy Securities Inc., suggests that this holdback is likely the largest ever seen in this corner of the securities market, raising concerns about potential hurdles for investors as other deals face default.
While details regarding the large holdback remain scarce, it is speculated that Midland, a unit of PNC Financial Services Group Inc., may have retained the funds to cover unforeseen expenses related to potential litigation from bondholders. More than a month after the disclosure, Midland has not provided substantial details on the matter.
This development has prompted discussions about the control investors have in such situations, introducing a new level of risk that could disrupt expected returns. As the real estate industry contends with distress, this missing $164 million is seen as a cautionary tale, emphasizing the challenges special servicers may face in resolving deals amid market uncertainties.
