trending Market Intelligence /marketintelligence/en/news-insights/trending/Dnjp8JDt6HzL7Lsm5NXz3Q2 content esgSubNav
In This List

Mortgage REIT's $174.4M court-supervised asset sale a product of lengthy process

Podcast

Street Talk Episode 87

Blog

A New Dawn for European Bank M&A Top 5 Trends

Blog

Insight Weekly: US banks' loan growth; record share buybacks; utility M&A outlook

Blog

Banking Essentials Newsletter 2021: December Edition


Mortgage REIT's $174.4M court-supervised asset sale a product of lengthy process

Just short of two years after its board formally initiated a review of strategic alternatives, RAIT Financial Trust revealed a proposed sale in conjunction with its filing for Chapter 11 bankruptcy protection.

The process as detailed in a Sept. 2 bankruptcy court filing included two separate rounds of marketing the commercial mortgage real estate investment trust for sale to numerous prospective buyers and a six-month due diligence period for an affiliate of Fortress Investment Group LLC, which emerged as the stalking-horse bidder for substantially all of RAIT's assets in a deal valued at $174.4 million.

RAIT, which suffered losses of nearly $1.47 billion in the aggregate between 2008 and 2018 on developments such as mortgage write-offs and asset write-downs, had previously disclosed the launch and outcome of the initial strategic review process. On Sept. 7, 2017, the company said its board formed a special committee and retained Barclays Capital and UBS Investment Bank to consider options to maximize shareholder value. Approximately five months later, RAIT said the "deliberate and comprehensive" review process had not identified a transaction that the company deemed preferable to a series of actions intended to boost liquidity and better position it to meet future financial obligations. Those steps included the suspension of RAIT's lending business and efforts to sell its portfolio of real estate-owned and certain commercial real estate loans.

RAIT President and CEO John Reyle said in a bankruptcy court declaration that the company and its advisers contacted 84 potential buyers and investors during the initial part of the review process. It entered nondisclosure agreements with 33 of them, then received eight bids from potential counterparties. Two counterparties submitted a second round of proposals, one of which subsequently entered an exclusivity period during which it reviewed due diligence information and exchanged prospective transaction documents.

By February 2018, the counterparty that Reyle did not name in the filing served notice that it would not proceed with a transaction. The other second-round counterparty, which RAIT contacted following receipt of that news, was "not prepared to complete a transaction that was structurally agreeable," Reyle said. RAIT then issued its public announcement about the outcome of the review process.

By the second half of 2018, Reyle reported that RAIT had rekindled the strategic review process. It solicited meetings and proposals from nine separate counterparties, some of which had previously been identified in the initial review. Reyle said the process generated five preliminary proposals from four of the counterparties. UBS, which RAIT reengaged in late 2018, reached out to additional counterparties and set a January 2019 due date for final proposals. The company ultimately received four proposals, and the RAIT board determined that one submitted by Fortress Credit Advisors LLC represented "the most attractive in terms of value, form of consideration, and lack of execution risk," Reyle said.

The two sides entered a nonbinding term sheet on March 6, which called for Fortress' purchase of RAIT's reorganized equity interests. Fortress then conducted nearly six months of due diligence on RAIT's entities and the proposed transaction structure. It also engaged in "lengthy negotiations" with RAIT over the deal's terms, structure and conditions and regarding the proposed bidding procedures to be followed in a bankruptcy court-supervised auction process. The parties ultimately decided to move forward with a transaction structure that contemplates the sale of the equity interests of a RAIT subsidiary along with certain other assets in a process to be conducted under Section 363 of the U.S. Bankruptcy Code. As RAIT itself is not part of the revised structure, the company will be wound down under a Chapter 11 liquidation plan, Reyle said.

The Chapter 11 filing is believed to be the first by a stand-alone entity under S&P Global Market Intelligence coverage as a mortgage REIT since an involuntary petition was brought against Desert Capital REIT Inc. by certain creditors in April 2011. A year prior to that, American Mortgage Acceptance Co. voluntarily filed a Chapter 11 petition.

Coincidentally, RAIT was the collateral manager for certain Taberna Preferred Funding securitization vehicles that American Mortgage Acceptance listed among its largest creditors and for one of the two petitioning creditors of Desert Capital REIT. The collateral management function for the Taberna Preferred Funding entity that served as the other Desert Capital REIT petitioning creditor had previously been sold or delegated by RAIT in a $16.5 million transaction with Fortress affiliates, according to the company's 2010 Form 10-K. The Taberna Preferred Funding vehicles are collateralized debt obligations backed by trust preferred securities and certain other investments.

Reyle said RAIT is seeking to complete the asset sale as quickly as possible to maximize recoveries for its creditors and other stakeholders.