Royal Bank of Canada sued over CMBS margin calls

Bloomberg

Royal Bank of Canada (RBC) is using the coronavirus pandemic to seize a large portfolio of assets at rock-bottom prices, a New York real estate investment trust (REIT) claims.
In a suit in federal court in Manhattan, a subsidiary of AG Mortgage Investment Trust Inc. said it received March 23 margin calls from Canada’s largest lender. According to the complaint, RBC said the REIT’s commercial mortgage-backed securities have “drastically declined” in value due to the crisis, allowing the bank to demand additional cash or securities to meet requirements.
But the trust says the calls are entirely subjective and don’t actually reflect the true value of the CMBS. While many other banks have agreed not to pursue remedies against mortgage real estate investment trusts, RBC has refused – and planned to hold an auction Wednesday that included $11 million of the trust’s assets, the lawsuit says.
RBC declined to comment on the lawsuit. The bank is selling hundreds of millions of dollars worth of commercial real-estate debt seized from clients in recent days, moving to protect itself as pain spreads through the mortgage market, the Wall Street Journal reported, citing unidentified people familiar with the matter.
The coronavirus is wreaking havoc in the $16 trillion US mortgage market, which is suffering its worst turmoil in more than a decade. Firms that invest in mortgage-backed securities are facing margin calls and sinking valuations, forcing them to solicit offers on billions in assets in emergency sales.

‘Fire-Sale Prices’
RBC “is hitting the accelerator to unlawfully seize and unload a large portfolio of plaintiffs’ assets at fire-sale prices into the seized markets which will have a cascading effect in the market for mortgage-based assets,” the trust said.
The bank’s auction “would not only dramatically and prejudicially underprice these securities to plaintiffs’ detriment, but would also likely precipitate a chain reaction of other banks being pressured to foreclose on other mREITs’ pledged securities, all at prices informed by the fire sale that defendants seek to hold,” the trust said in the suit.
The REIT is seeking a court order blocking the auction and stopping RBC from taking any actions against its assets “pending compliance with the parties’ agreements and current government guidance and regulations designed to stabilize the economy.” US District Judge Lorna G. Schofield denied the trust’s application for an emergency application, saying the appropriate papers weren’t filed until three hours after the auction was supposed to take place.
AG Mortgage Investment Trust announced it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Eric Hagen, an analyst at KBW, said other firms are also likely facing margin calls “especially given the challenging overall environment for sourcing
liquidity.”