Mortgage default threat... red herring? There is, as far as I can see, little reason to believe that a default on a mortgage would result in the entire REIT being placed into receivership or bankruptcy. According to the May 11th news release, Lanesborough had actually actually defaulted on 12 of its Fort McMurray mortgages. They then go on to state that they have wrung concessions out of a number of these mortgage lenders. LREIT apparently obtained those concessions without making any of significance themselves on the generous property management and service fees paid to related parties and without any changes being made to the terms of the revolving loan (which also involves a related party) or the debentures. Furthermore, in this general time frame, insiders managed to transfer almost $4 million in cash from LREIT's books to those of a related party. If the mortgage lenders were in a position to force Lanesborough into bankruptcy, then why are we not there now? I can only speculate that it is because they cannot or that there is some very large barrier dissuading them.
What do I mean why I say that perhaps they cannot force LREIT into bankruptcy? Whether mortgage lenders can force the borrower into bankruptcy depends on how the mortgages are structured. If the mortgages are nonrecourse, that would mean that the lender would be able to foreclose on the property and sell it, but that they would have no other recourse than that to get their money back: they would have no right to go after Lanesborough for any shortfall. That mortgage lenders did not step in to stop or reverse the multimillion dollar payment to a related party suggests to me that these may indeed be nonrecourse mortgages. On the other hand, if they are recourse mortgages, then for the same reason, I suspect that the terms of the mortgages (or some other factor) nevertheless makes the prospect of placing LREIT into receivership unattractive to them. Otherwise, I'll ask again, why are we not in receivership or bankruptcy already?
If they let LREIT pay almost $4 million to a related party, then I cannot see why they would intervene to prevent the approximately $1 million legitimate June interest to debentureholders who are, almost exclusively, unrelated parties.
I don't believe we should be afraid of the mortgage lenders placing LREIT into receivership (not at present anyway, especially given recent events in Fort McMurray). I do believe, however, that stakeholders should be more mindful of that option coming from debentureholders. It is a nuclear option, to be sure, but one that should not be discounted, especailly if we are offered insulting terms. When I read the proposed debenture amendments, I feel disrespected, as though I were being taken for a fool. I don't believe I am one, so I intend to vote no.
Important disclaimer: All the above is intended to express my opinion only. I am not an expert on anything discussed, and it is possible and perhaps likely that I am ill informed on certain aspects. It is presented for fair comment and discussion purposes only. None of it is intended to be taken as fact. As such, it is all not reliable. So do not use any of it to make decisions or judgements or to form opinions, and do not use it as the basis of any action. If you do plan to form decisions, judgements, or opinions or to take action on anything discussed, first seek your own independent, expert advice.