JP Morgan Chase (NYSE:JPM)
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NEW YORK (Dow Jones)--J.P. Morgan Chase & Co. (JPM) is bringing back sales of commercial mortgage-backed securities supported by delinquent loans for the first time since the late 1990s, providing new incentives for buyers of distressed debt.
Thursday, J.P. Morgan told investors it will sell $132 million of bonds supported by nonperforming loans or other troubled debt purchased by Rialto Capital Management, a distressed investment firm owned by homebuilder Lennar Corp. (LEN, LENB).
The CMBS are the first of their type since regulators used similar methods to dispose of troubled assets after the savings-and-loan crisis. In the late 1980s and early 1990s, the government formed the Resolution Trust Corp. to work through hundreds of thousands of residential and commercial loans. The agency in 1992 began selling pools of bad debt carved up into bonds sold to investors and was credited for helping to clear banks' balance sheets and make way for a rebound.
"There is an estimated $75 billion to $100 billion of distressed commercial debt out there that has yet to be dealt with, so this could be part of the cleanup process," said Tad Philipp, director of commercial-real-estate research at Moody's.
A J.P. Morgan spokesman declined to comment.
Analysts anticipated such securitizations could become a popular way for investors to finance purchases of loans from banks and loan servicers saddled with the responsibility of distressed loans. At least five funds have expressed interest in such deals to Moody's Investors Service, as ratings are key to determining investor demand and bond pricing.
The CMBS proceeds will finance about 59% of Rialto's $224 million purchase, which was 42.6% of the loans' unpaid principal balance, according to a presale report from Moody's, which rated the issue Baa3, a low investment grade. In all, Rialto supplied the deal with 282 loans, of which 224 are nonperforming.
J.P. Morgan for the past year has been working toward structuring such distressed bonds with a "fast pay" structure where interest and principal pays off the investors and then the issuer as the loan servicer sells the property or otherwise resolves the default. The faster the resolution of the loans, the faster the issuer gets proceeds and the higher the return on investment.
Rialto expects to take 60 months to resolve the delinquency on the largest loan in the portfolio, a $51 million note secured by South Carolina hotels.
-By Al Yoon, Dow Jones Newswires; 212-416-3216; email@example.com