Brokerage firms that arranged loans for the stalled Drew Las Vegas construction project and South Korean institutional investors at risk of losing their money disagree on whether senior lender JP Morgan bears some responsibility for the debacle.

Underwriters and around 15 institutions that invested in the project sent a letter to JP Morgan at the end of last month after the U.S. investment bank’s unexpected decision to sell the security interest on its loans, industry sources said on Wednesday (February 24).

A deed in lieu was undertaken by a borrower and JP Morgan, as the senior lender, studied an option to sell the security rights over the property. Numerous potential buyers have reportedly expressed interest in taking over the rights.

JP Morgan provided a mortgage loan of $350 million and senior mezzanine loans worth $100 million in October 2018 and Hana Financial Investment took over the senior mezzanine loans in July 2019.

Institutional investors and underwriters entered talks with JP Morgan in December 2020 after they belatedly recognized the fact that mezzanine investors will lose their rights when the deed in lieu is pursued. They wanted to delay the possible sale of assets and acquire JP Morgan’s security interest on the loans. If the assets are sold, institutions are in a position to lose their investments, worth a combined $250 million.

JP Morgan suddenly took a stronger stance, telling institutions and arrangers that it would no longer proceed with discussions on issues, including extending the maturity of mortgage loans, on January 26. JP Morgan also said it would sell all its mortgage loans unless the institutions and underwriters took them over by February 9.

The institutions and underwriters sent a letter regretting that JP Morgan had made such an arbitrary decision, but the U.S. firm sold the assets to a foreign buyer and institutions are highly likely to lose their principals. During this process, institutions and arrangers asked a law firm whether there was any legal problem with JP Morgan’s decision, but they reportedly were told that it hadn’t violated the law.

Even so, Mirae Asset Daewoo and NH Investment & Securities have blamed JP Morgan for the investment losses. “We are checking some problems with JP Morgan’s side,” said an official at an underwriter.

However, institutions claim that the underwriters made little progress when they tried to come up with some countermeasures, and they ended up losing all of their investments. They also believe that JP Morgan made a reasonable decision based on its rights. In fact, JP Morgan reportedly received a premium on the investment when divesting its assets, which contrasts with domestic institutions’ situation.

“Institutions and underwriters discussed the amount of JP Morgan’s senior loans they each have to take over, but they failed to reach an agreement,” said a source familiar with the matter.

The institutions include Hyundai Motor Securities and Shinhan Financial Investment, along with underwriters Hana Financial Investment, Mirae Asset Daewoo and NH Investment & Securities. Hyundai Motor Securities bought some of the junior mezzanine loans. Shinhan Financial Investment acquired some of the senior mezzanine loans and sold them as derivative linked securities to individual investors.

The project was valued at around $1 billion in October 2020, about two months after the default occurred. Institutions and arrangers could have earned assets worth $1 billion if they had spent an additional $350 million acquiring JP Morgan’s security rights on senior loans, in addition to their existing investments of $250 million.

It is not certain how many of the assets would have been sold, but it could have been a better outcome than having lost all of their investments, industry sources said. (Reporting by Byung-yoon Kim)