There’s a War Going On

The dizzyingly complex securitized deals of the 2000s were a little like polygamous marriages in which the vows—in this case, pooling and servicing agreements—did not really count on facing sickness as well as health, or being poorer as well as richer. As long as cash flow was positive and debt was serviced, the marriages were harmonious. But as the market turned turbulent and deals began to run aground, the spouses began to squabble. More to the point, they hauled one another into court to assert their rights within the capital stack and protect their investments.

The result is an outbreak of tranche warfare: infighting among lenders and, in some cases, investors. Arguably the highest-profile example has stemmed from the foreclosure of the Peter Cooper Village/Stuyvesant Town complex in Manhattan, but it’s hardly an isolated incident.

Mark Edelstein, New York City-based partner in the real estate/workout practice at Morrison & Foerster, tells Distressed Assets Investor that “there are tons of litigation going on.” Although his firm, which has been involved with the Extended Stay Hotel and General Growth Properties bankruptcy cases, predicted the advent of tranche warfare two years ago, “it’s been more than we expected.”

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