Friday, June 11, 2010

Dallas Business Journal - by Chad Eric Watt Staff Writer

Such are the complications in syndication and participation loans, many of which are on the verge of going bad and

leading up to long court battles, says a former bank regulator.

A Dallas County district court judge in May ordered NexBank to pay Orix Finance Corp. $7.7 million for

breaching the contract between the two lenders in the $50 million loan to Marcal Paper Mills Inc. NexBank and

Orix are both based in Dallas.

The two companies, along with affiliates of Highland Capital Management, a Dallas hedge fund, held the loan

when the New Jersey business filed for bankruptcy protection.

On its own, NexBank doesn't have the capacity to book $50 million loans. To do so, it lines up secondary lenders to buy pieces of the deals

and acts as an administrator for the life of the loans.

Loan syndication is a big business for NexBank. It often works with Highland Capital, which has about $24 billion in assets. NexBank and

Highland Capital have many of the same owners.

"That business for us is how we build a bank model on something different than branches or fees,” said Davis Deadman, CEO of NexBank.

Syndications, loan participations and other complex financing deals became wildly popular in the easy-credit years that preceded the

2008 recession, as lenders of every flavor battled to book deals, said Chris Kelly, a former bank regulator and litigation consultant at the

Dallas office of Houston-based valuation and litigation firm Hill Schwartz Spilker Keller LLC.

The Orix-NexBank deal went bad when the lending competition was still going strong. A big wave of similarly complex deals are just now

going sour, which should lead to even more lender-versus-lender disputes, he said.

The different players in loan syndication — traditional banks, private equity investors, life insurance companies and other financing

businesses — make it difficult to put a number on how many complex financial deals are heading toward trouble. Some $815 billion in

commercial mortgage-backed securities are coming due in the next three years, according to Oakland-based research firm Foresight

Analytics.

"When these go bad, you get lots of finger-pointing,” Kelly said.

The Orix-NexBank case turned on whether Orix, which owned a minority share of the debt, had the right to veto a plan by other

noteholders to convert the debt into a loan-to-own strategy.

Mike Lynn of Lynn Tillotson Pinker & Cox LLP, which represented Orix in the lawsuit, said the loan gave Orix the right to request

payment rather than go along with changing the terms of the agreement. The $7.7 million judgment amounts to a discounted cash payout

for Orix's $10 million share plus interest.

Lynn called the ruling a good sign for hedge funds, finance businesses and other noteholders with a minority position in big loans that go

sour.

"You're going to see people wanting to enforce their rights so they're not taken advantage of,” Lynn said. "There will be others who will be

able to assert (that right),” he said.

In a statement, NexBank says it is contractually protected against paying the judgment.

"NexBank's role as ‘agent' followed standard operating procedures, (and) the bank is contractually indemnified from any final ruling, even

the unlikely one which could impose some financial obligation,” the bank said via a spokeswoman.

In an e-mail, Orix Finance Senior Litigation Counsel Greg May said, "We've always felt strongly about our rights in this situation, and

obviously we're pleased that Judge (Martin) Hoffman ruled in our favor.”

NexBank and its affiliate Highland Capital Management are involved in a number of lawsuits, including a dispute filed in February by

rapper/entrepreneur Jay-Z who defaulted on a $52 million loan from Highland and NexBank to develop a Manhattan hotel.

NexBank ended up in court because of the nature of its business, Deadman said.

"It's just like somebody who services a big mortgage pool. We have to sue the borrower or we have to foreclose,” he said.

Don't blame the loan structures, blame the demand, said Keith Mullen, an attorney specializing in real estate finance workouts at

Winstead law firm.

"There was so much money chasing deals that you could sell something without people doing much due diligence because there was so

much competition for the deal,” he said.

With lenders competing just to invest, few were looking at whether the deal was worth doing, he said.

The complexity of securitizations, participations and syndications is one of the key differences between resolving bad loans today and

doing so in the post-1980s real estate crash.

"The hardest part of workouts right now is not dealing with borrowers, it's dealing with the creditor stack,” Mullen said.

That's only going to help further delay a full recovery, particularly in the real estate sector, he said.

"It's going to take more time for real estate markets to get back to pricing certainty and return to growth,” Mullen said.

NexBank, Orix fight finally ends - Dallas Business Journal Page 2 of 2

http://dallas.bizjournals.com/dallas/stories/2010/06/14/story1.html?b=1276488000%5E348... 6/11/2010