Shortfalls creep into Goldman Sachs double-A CMBS pool
Barclays Capital notified investors of shortfalls on a double-A rated Goldman Sachs commercial mortgage-backed securities pool, one of the highest CMBS tranches to see a shortage of interest payments. Shortfalls occur when fees and expenses associated with troubled loans reduce the amount of interest available to be paid on CMBS bonds. The spike in shortfalls in the GSMS 2007-GG10 transaction, a benchmark CMBS deal, were related to the Holiday Inn portfolio that was declared "non-recoverable" by the servicer. The servicer, which is unnamed by BarCap, reported there were $2.2 million in recoverable advances for this loan. Roughly $900,000 in advances were applied in September with another $1.3 million expected in the October and November remittance periods. The additional trust fund expenses were reduced to $3.3 million because of the "non-recoverable" advances. While BarCap said remittance reports are becoming more common, this particular one grabbed their attention because the servicer essentially decided to waive its right for an early recovery of those advances. More troubled deals with hotels as the collateral could be in trouble. According to the credit rating agency Fitch Ratings, the delinquency rate on hotels passed 20% in August, up from 18.6% in July. In CMBS deals such as this, which are paid out pro-rata, cracks creeping up investment grade tranches will likely worry investors in the higher dupers and triple-As. In the BarCap report, interest shortfalls reached as high as a double-A rated tranche but was later revised for the interest short falls to stop at a lower tranche that received only partial interest and was rated at single-A. As a result the $34.1 million in interest distribution was paid in full to only tranches D and E with tranche F receiving only partial interest. Tranche C, which originally received only partial interest was given the remaining accrual interest. "It is very common that the servicer might decide to apply only a certain amount of interest shortfalls in a given period in such a way that the originally rated investment grade tranches are not hurt," according to BarCap. "Therefore, application of additional shortfalls in future remittance periods is also common. However, revisions associated with this treatment are not that common." Analysts at BarCap were also interested in this particular deal because the total amount of advances associated with the non-recoverable loan was revised, too, from $2.2 million down to $1.1 million. According to BarCap, this suggests the loan is about to be liquidated, and the servicer doesn't see any need to recover the advances before the sale. Write to Jon Prior.