What took them so long? After months of being unable to service its debt, and numerous SEC filings describing the Company’s inability to cure its defaults, secured lenders finally closed in on Anthracite Capital, a struggling Mortgage REIT with a “legacy” portfolio full of almost worthless CMBS equity.
While events began to spin out of Anthracite’s control a long time ago, the official death bell began tolling on February 1st, when Deutsche Bank finally declared its loans immediately due and payable. Bank of America followed shortly afterward, and this left Anthracite with no assets of any real value and no choice but to liquidate. Today, Anthracite made it official: they are throwing in the towel, and shareholders (to the extent there were any left) will mostly get nothing.
The company was highly levered, which is not unusual in the Mortgage REIT world. However, Anthracite invested in the very bottom end of the CMBS credit stack – the equity, or “B” piece. Anthracite liked to refer to this as “controlling class” CMBS in its earnings reports, and in normal markets, the ability to control the underlying asset would normally provide more junior CMBS investors with some measure of comfort. Unfortunately, this is no normal market, and Anthracite’s “controlling class” CMBS was so junior that there’s not much left to control.
Had Anthracite invested a little higher up the food chain, or stepped back from the market as it began to overheat, it’s possible in theory at least, that Anthracite could have avoided today’s liquidation announcement. Unfortunately, Anthracite did exactly the opposite. As the market began to overheat, Anthracite also stepped up its purchases of CMBS equity:
As I wrote in this earlier post on Anthracite, The “B” piece buyers had always been a limiting factor in overall CMBS issuance. Not only were there not that many of them, but they also had veto power over any individual loan that could decrease their chances of getting fully paid out. As more yield-hungy investors clamored for more “B” notes, they began to exercise their veto rights less often. Underwiters and issuers, who were only in it for the fees and cared not about repayment, were then able to stuff more and more junk into the pipeline, and CMBS issuance ballooned.
As more and more of this junk was being stuffed into the pipeline, Anthracite was gobbling up just as much as it could. In hindsight, this was obviously a mistake, but less obviously it should also lead investors to another conclusion: externally managed REITs deserve a little more scrutiny than internally managed REITs. Blackrock, Anthracite’s external manager, was paid primarily based on assets under management, not to maximize the value of those assets. This model almost guaranteed a buying binge, since the more Anthracite owned, the more Blackrock got paid. Given its more risky business model, internal management alone would not have saved Anthracite, but it’s definitely a factor worth considering before left clicking on the “buy” button.