T acquisitions that are credit positive for the industry. Increased scale lowers tenant concentration. Ventas will more than double the size of its healthcare real estate portfolio, and with increased size Ventas will be making great strides towards reducing its tenant concentration. This concentration, which has long been the weakest aspect of its credit profile, had declined over the years and is lower under the acquisition, albeit still high at 19% of pro forma net operating income. Increased size also means an increased number of operator relationships across multiple healthcare property sub-sectors, including senior housing, skilled nursing facilities, hospitals, and medical office buildings. These relationships are important sources of transactions to fuel Ventas¡¯ continued growth. Metrics improve. Another key credit positive of the NHP deal is the all-stock consideration being paid, which will have an immediate positive impact on Ventas¡¯s secured debt level, its weakest financial credit metric. Bigger is better in today¡¯s market. The Ventas-NHP deal is one among a series of transformative transactions recently announced in the healthcare REIT sector, all of which are credit positive for the industry. Last December, HCP (Baa2 stable) announced a $6 billion sale-leaseback agreement to acquire most of the real estate assets of privately owned HCR ManorCare, a best-in-class skilled nursing operator. More recently, Health Care REIT (Baa2 stable) announced five large transactions totaling $4.6 billion, the most significant of which was a sale-leaseback with Genesis Healthcare, a large skilled nursing provider. All of these transactions are credit positive as the three largest healthcare REITs are increasing their scale, creating a large size gap between them and their smaller REIT peers. With increased size, modest leverage, and diversification across a spectrum of property sub-types, these REITs will improve their cost of capital. With access to attractively priced capital, the three largest healthcare REITs will be able to accommodate operators¡¯ growth in the senior living, post-acute, and medical office sub-sectors. These REITs have established relationships with some of the best and largest operators, which are seeking to grow within their respective sub-sectors. The continued economic recovery, combined with a growing population of seniors and limited new supply of senior living facilities supports the expansion of senior living businesses. In this sub-sector, demand is improving as the economic recovery improves seniors¡¯ ability to sell their homes and afford high monthly rental payments.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
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NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Expansion for REITs and their operators is also occurring in the post-acute and outpatient subsectors. Post-acute care facilities are where patients receive treatment after discharge from a hospital. The tenets of healthcare reform stress improved efficiency and quality of care, which favor care outside of a hospital in either a post-acute or outpatient setting. A wave of consolidation has already occurred in the post-acute space, and post-acute providers are trying to establish larger, more efficient businesses in order to compete in the new era of post-healthcare reform.
Yehudah Forster Vice President - Senior Analyst +1.212.553.7995 yehudah.forster@moodys.com
New York Court¡¯s Rejection of MERS Mortage Assignment Is Credit Negative for RMBS
On 10 February, the US Bankruptcy Court in the Eastern District of New York issued a ruling that limits servicers¡¯ ability to foreclose on MERS loans whose borrowers declare bankruptcy in the Eastern District of New York.23 The decision in this case, In re: Ferrel L. Agard, will encourage borrowers to continue to raise technical challenges to foreclosures on MERS loans and has negative repercussions for residential mortgage-backed securities. However, it is too early to tell if the decision will spread to other jurisdictions or if it will have longterm ramifications. An appeal of the court¡¯s very narrow reading of MERS¡¯s authority is likely and two other courts that addressed the same issue last month came to the opposite conclusion. Further, potential workarounds may exist to address the New York decision. MERS matters. The issue of whether the electronic mortgage registration service has the right to assign the mortgage is important for RMBS. MERS is reportedly listed as the owner of record and nominee for the lender on more than 50% of the outstanding mortgages in the US. Servicers typically produce an assignment of mortgage document assigning the mortgage out of MERS¡¯s name and into the name of the RMBS trust prior to initiating a foreclosure. If MERS doesn¡¯t have the right to assign the mortgage, a court may not permit the servicer to foreclose for lack of standing. Rejection of MERS¡¯s authority to assign mortgages. The Agard decision concluded that MERS did not have authority to assign the mortgage to the securitization trust. The court ultimately ruled in favor of the servicer on other technical grounds, but had it not done so, its conclusion about MERS would have left the servicer without standing to foreclose or seek relief from the automatic stay. The court very narrowly applied MERS¡¯s rights under the documents and under New York agency law. In future cases, the servicer would need to show additional proof that the RMBS trust validly holds both the note and the mortgage in order to prove standing to foreclose. Decision applies only to one jurisdiction so far. The Agard decision will stymie foreclosures on MERS loans whose borrowers declare bankruptcy in the Eastern District of New York. For those cases, servicers may not be able to foreclose unless they can show additional proof, aside from the assignment by MERS, that the RMBS trust owns the mortgage. The adoption of Agard¡¯s reasoning by other jurisdictions would have a broad negative impact on RMBS; however, at this point it is doubtful that other jurisdictions will do so. Two other courts that addressed the same issue in February reached the opposite conclusion.24 Furthermore, it is also
23 24
The Eastern District of New York covers Staten Island, Brooklyn, Queens, and Nassau and Suffolk counties. See In Re: Henry Lopez (US Bankruptcy Court, District of Massachusetts, Eastern Division), 9 February 2011, and John J. Powers and Rose M. Powers v. Aurora Loan Services (Superior Court, Cheshire, New Hampshire), 14 February 2011.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
doubtful whether the Agard reasoning will ultimately stand, even in the US Bankruptcy Court for the Eastern District of New York. An appellate court will ultimately review the Agard¡¯s case conclusion. Workarounds possible. Even if the Agard decision becomes the law in some jurisdictions, parties will, in many cases, be able to work around the issue. For example, some servicers will try to prove a trust¡¯s ownership in the mortgage by producing documents other than the assignment. Another option is for MERS to amend its membership agreement to state more explicitly that lenders give it the power to assign the mortgage on their behalf. Yet, the broader concern that the Agard case raises for RMBS is the increasing phenomenon of borrowers attacking foreclosures on technical grounds, and courts being unwilling to accept the economic reality that the RMBS trust owns the loan. Even if the industry finds a way to deal with the Agard case, the question remains as to what the next issue will be.
Mack Caldwell Senior Vice President +1.212.553.4106 mcginnis.caldwell@moodys.com
Revived New York Bill Weakens Auto Loan ABS
As of 1 March, after six months of silence, proposed New York State legislation that disrupts the current practice of assigning a security interest in an auto is back on the table. The legislation, if passed, will weaken existing auto loan securitizations¡¯ security interests in New York autos. Also, if the bill passes, New York will be the only state in the US with legislation of this kind. The bill requires recordation of security interest. The new bill is unique because it requires an assignee of an auto loan, such as an auto loan securitization, to record its interest in the underlying security, the auto itself. The assignee accomplishes recordation by physically noting itself as the new holder of the security interest on the vehicle¡¯s title. Currently, only the original lender records this information because New York¡¯s commercial code, which is the current law, explicitly states that an assignee of a security interest in an auto does not have to take affirmative steps to have a valid security interest in the auto. In addition, the bill requires the assigning party to notify the borrower of the assignment of the security interest in his or her vehicle within 10 days of the assignment. The intended purpose of this provision is to protect the borrower who wants to sell an auto for which the recorded holder of the security interest has assigned its security interest in the vehicle. Existing law already requires the recorded holder of the security interest to deliver clean auto titles to the borrower once the borrower has paid back the auto loan. Securitizations¡¯ existing security interests are weaker. The new legislation weakens the security interests held by auto loan securitizations. Under the proposed legislation, assignees such as existing securitizations will not know whether their interest in New York autos is sufficient to protect them from claims of other creditors.