Note: Some of these comments were made to press and were quoted in news stories.

Sep 27, 2010

First Investment Grade Conduit CMBS Bond Takes a Loss

The originally BBB- rated bond from WBCMT 2005-C20 deal became the first originally investment-grade rated bond in a CMBS conduit deal to take a loss in this cycle. It was not treated as a big news, as losses are not unexpected and surely there will be more in future. In this case, the loss was caused by a $131 mm loan that was liquidated with a loss of $127 mm or 97% of loan amount. The loss was higher than the $107 mm appraisal reduction on the loan. This loan was backed by the Macon Mall in Macon, GA and the Burlington Mall in Burlington, NC, which were appraised at $176.5 mm in 2005. This high loss was in a 2005 deal which is considered a better vintage generally than 2006 & 2007 vintages, and is another example showing that applying generic default and loss assumptions based on vintage etc does not work for legacy CMBS bond analysis.

Sep 20, 2010

TRX: Build It & They Will Come!

Several commercial real estate loan conduits are gearing up to start origination and have started quoting loans, which is a good thing for the CRE market. In many cases in larger loans, the risk of changes in bond spreads can be borne by the borrower, not the loan originator, in which case the lender does not need to hedge the risk of widening in bond spreads. Also, spreads have generally been tightening and the one-sided movement is beneficial to originator and reduces the need for hedging. However, as originators have started taking more risk and spreads have tightened rapidly, with less uncertainty on bond spreads and more competition from lenders, there may be more need for hedging than can be done efficiently with CMBX. Total Return Swaps, which were traditionally used by originators to hedge, will be efficient and ideal. TRX can provide that ability in a standardized format. However, TRX has not seen a lot of activity, and so does not receive a lot of attention. The problem with TRX is that it in one index that includes all the bonds in all the CMBX indices – making it less than ideal for taking any type of view. For hedgers, best will be a new TRX index based on the new deals. If the industry builds more focused TRX indices, that  will likely attract more investors.

Sep 13, 2010

Regulatory & Legal Uncertainty Impacts New Issue Deal Demand & Pricing

Two recently priced deals provide an example of how regulatory & legal uncertainty can have an impact on demand & pricing for new issue securitizations. The collateral for the VNO and CNTR deals that priced recently are similar in many ways. Both are backed by retail properties, primarily grocery-anchored shopping centers. Both are about 58 LTV. Other differences may be considered to be not that significant. Yet, the VNO deal priced tighter than expected, whereas the CNTR deal priced wider than expected even as the rest of CMBS market was tightening. Part of the reason for this was  concern on financial condition of Centro, the sponsor of the CNTR deal. Normally, in a securitized deal with a true sale and bankruptcy-remote structure , condition of sponsor will be less of a concern, but with what happened on the GGP deal, many investors were concerned enough to demand higher spread to compensate for the uncertainty.

Aug 30, 2010

CMBS Servicers Not Just Extending & Pretending

Loan extension has been one of the most common modification strategies used by special servicers, and has been criticized by many as extend-and-pretend or delay-and-pray, etc. However, that is not the only modification being done.  A recent example is the 270 Peachtree loan on a 336,000 sf office in Atlanta in the LBUBS 2000-C3 deal. The $33.9 million loan which had matured in July 2009, was modified in three respects – $10.87 million or about 32% principal was forgiven, loan coupon was dropped from 7.77% to 3%, and loan was extended by two years.  In another example, a $18.25 mm loan on Houston apartments was modified to forgive 33% of the loan along with an 18 month extension. As the volume of these modifications grows, it will become even more important  for CMBS investors to have a good surveillance program.

Aug 23, 2010

War: Will Its End Help or Hinder the Economy?

Historically wars have been good for the economy. So what would the end of Iraq and Afghanistan wars mean for the US economy? On Aug 19, with the combat troops leaving the country, the Iraq war was declared to be over after seven and a half years. Plan is to pull US troops out of Afghanistan by next year. The two wars have cost US roughly $1 trillion since 2001 or $110 billion/year. With wars scaling down and deficit & debt at high levels, the defense department and congress have already started talking about reducing military spending-starting with a proposal to close the Joint Forces Command base in Norfolk, VA which includes 2,800 military & civilian positions and 3,000 contractors. Lower spending will decrease the stimulus from that spending. Also consider that these wars were financed by increased deficit & debt, and there was not a huge buildup for exports to help reconstruction effort abroad.

Aug 16, 2010

Pershing Square & Winthrop’s Bold & Creative Move On Stuy Town

When most people are valuing the Stuyvesant Town & Peter Cooper Village around $2 Bn, move by Pershing Square and Winthrop to pay $45 mm to jointly purchase the  Mezzanine loans junior to the $3 Bn senior loan shows boldness and creativity. They paid $45 mm for the mezz loans that many considered worthless, and are now foreclosing on the mezz to step into the borrower’s shoes. Simplistically, they become owners of a $2 Bn property with a $3 Bn loan. However, this will give them ability to negotiate with the special servicer and tenants, or try to use a bankruptcy filing to work out the loan. The creative part of their move is that they get to a much higher value than most others by using a plan to convert the buildings to coops with the support of tenants. In any case, the $45 mm price for the mezz will be worthwhile since it can help avoid the approximately $100 mm in transfer taxes that a foreclosure on the properties would entail.

Aug 2, 2010

Greater than 100% Losses on Liquidated CMBS Loans Show the Importance of Expenses

The 30 million New Horizon Apartment loan in IQ12 deal suffered a loss greater than 100% of loan balance. The loan has been in news because it caused interest shortfall as high as the AM bond in the deal in July, the first AM bond to face a shortfall. However, equally important fact is the loss that was greater than the loan balance. That could be expected for smaller loans, but not for a loan of this size. There have been other cases of large losses including the $40 mm Crossroads Mall which had 82% loss severity. Investors need to be careful when looking at loss severities on bonds, as blanket assumptions do not work. Expenses are important for loans too. Looking at some bids on non-performing loans, it appears that some investors may not be taking expenses into consideration.

July 26, 2010

Should Investors be Surprised at the lack of Distressed Investing Opportunities?

A lot of money was raised to invest in distressed commercial real estate. However, many are surprised that hoped for large opportunities to buy cheap assets have not materialized. Those remembering how much money was made buying cheap assets from RTC sales during the last real estate downturn of early 1990s are disappointed that the fire sales have not materialized this time. Many do not seem to realize that the investors were not the only ones who learnt from the early 90s experience. Owners of the assets, and the regulators, also learned that if the assets are sold at cheap fire sale type of prices, investors make a killing, but the owners of assets lose out. So this time around, the owners of the assets are trying to hold out as long as they can when it makes sense to do so, and regulators are prudently giving latitude to owners to avoid fire sales. Somehow, many seem to be disappointed at things not having played out the same way as they did in 90s! Although, this avoids quick indiscriminate fire sales for now,  eventually overleveraged owners without access to additional capital will need to refinance in the new low leverage environment.

July 19, 2010

CMBS Performance Will Be Deal Specific

As was the case in earlier downturns, CMBS deal performance will vary from deal to deal and that has started to become apparent. Some deals are already seeing interest shortfalls reach to bonds that were rated AAA originally. In April, LBUBS 07-C1 AJ was the first AJ tranche to face an interest shortfall. Since then other AJ classes from 05 and 08 vintages have faced interest shortfalls. This month 2006 vintage IQ12 deal had interest shortfall reach as high as the AM class. Even older vintage deals have faced problems. Examples include loans like Crossroads Mall in a 2003 deal that was liquidated and had a 82% loss, or Rolling Hill Apartment loan in a 2004  deal that had a 99% loss. Averages based on factors like vintage or shelf may not be sufficient to give a full picture.

July 12, 2010

Conflicting Signals In CRE Data

The data on commercial real estate is sending conflicting signals and is being read by different people in different ways. Cushman & Wakefield report last week  showing US CBD office vacancy dropping to 14.8 % in Q2 from 15% at end of Q1 -first drop since 2007, CMBS statistics showing declining pace of deterioration in delinquencies, etc are seen by many as signs that the CRE market is stabilizing. Others point to declining rents and high unemployment as factors that point to further declines ahead. Both the viewpoints have some validity, which probably implies that the CRE sector might move sideways in near term with some volatility caused by which of the two views is stronger at any given point. However, for CMBS, as opposed to  properties, a consensus that the property price decline has stopped will be enough for bond spreads to tighten. Real estate prices do not necessarily need to go up for CMBS spreads to tighten.

June 28, 2010

Rating Agency Reform Efforts Fail to Recognize Or Address the Most Basic Issue

In rating agency reform efforts, the issue of conflict of interest arising from issuers paying for the ratings has received the most attention. Even as the ratings gained a quasi regulatory status and became embedded in virtually all parts of the financial system with  Nationally Recognized Statistical Ratings Organizations (NRSRO) designation, the ratings have moved from being statistical ratings to incorporating more subjective opinions of future outcomes. This allows the agencies to take rating actions that actually impact the outcomes, and leaves them open to criticism if they don’t act. If NRSROs were required to stick to Statistical Ratings and base ratings only on known facts and past history, that may remove many issues, including perception of conflicts from issuer paid ratings.

June 14, 2010

Pricing of $716 MM Deal by JP a Step Forward for the CMBS Market

The $716 MM JPMCC 2010-C1 deal that priced on Friday was a step forward for the CMBS market in several ways. It is positive that most bonds saw good demand. From investors’ perspective, it is also good to see issuers moving toward lower LTV, higher DSCR, and in-place underwriting. The control shift based on appraisal reduction also moves the structure back towards what it used to be before the 2006 -2007 loosening of standards. However, pricing spreads were about 50 basis points wider than the RBS deal that priced in April, underscoring the fact that hedging loans while aggregating will be an important  for any prudent lender trying to close loans before securitization.

June 1, 2010

What does the Purchase of Extended Stay Say About State of CRE Markets?

What seems like the final chapter on Extended Stay for now is interesting to analyze. On Thursday, Centerbridge led consortium that includes Paulson & co and Blackstone Group won the auction for Extended Stay after 11 rounds of successively higher bids and a marathon bidding session lasting 19 hours, when the rival group including Starwood Capital and TPG decided against another higher bid. The final purchase price was $3.925 billion, which is good for holders of $4.1 billion CMBS bonds, who were looking at a much higher loss last year when Extended Stay’s advisors had pegged the value at somewhere between $2.8 to $3.6 billion. But, does the intensity of bidding indicate that market is reaching somewhat frothy levels? Probably not, especially if Blackstone is making a meaningful investment, as they know the assets and the company well, having owned it previously. They sold it at $8 billion to the Lightstone group in 2007, and are buying back in at $3.9 billion.  Also, since Extended Stay owns budget hotels and not trophy properties, the heavy bidding challenges the convenient notion of bifurcated markets with lot of demand for trophy type properties and lack of demand for others.

May 24, 2010

The Dichotomy in Commercial Real Estate Markets

There is a dichotomy in commercial real estate at present. On one hand, there are worries about commercial real estate, with S&P downgrading three insurance companies – Principal Financial, National Life and Pacific Life – a week ago citing expected losses on commercial mortgages and CMBS. On the other hand, every property we have looked at, has had 30 to 50 offers from possible buyers already. Portfolios of loans, especially better quality ones, have attracted a lot of buyers too. How do you reconcile the two views? If you purchased a loan or property at the old inflated price, you may be facing losses. But if you are buying based on today’s lower valuations, it might turn out to be a good investment, especially given the returns on other asset classes.


May 10, 2010

Is Optimism or Pessimism the Correct Feeling Towards the CMBS market?

Just when spread tightening in last two months had started making market participants more optimistic, volatility came back to the CMBS market, and is causing some to wonder if optimism is the appropriate feeling towards commercial real estate at this point. A recent survey reported in press of 300+ top executives within the US commercial real estate market by a law firm had an interesting statistic regarding optimism vs pessimism. The pessimistic part was that 60% of respondents described themselves as bearish and did not expect the CMBS market to return in time to help refinance more than $150 billion in CMBS loans coming due in next two years. The optimistic part was that the number of bears has come down from 90% in Sep 08 to the current 60%! So, is optimism or pessimism the correct feeling towards CMBS? Clearly one can find reasons for both. Also clear is the need for careful and appropriately deep analysis of risks and rewards. For those contemplating conduit loan originations, the volatility highlights the need for proper hedging of loans while aggregating the pool. If market participants worked out an efficient hedging mechanism, that will help the conduit CMBS market come back sooner, and that will make a lot more people more optimistic.


Apr 19, 2010

More Turbulence Ahead in CMBS Market?

Last week, dramatic tightening in CMBS spreads coincided with the first time an AJ tranche, originally rated AAA, faced interest shortfall. Also, CMBS delinquencies became higher than they have ever been in the history of the CMBS industry. All this points to more volatility ahead, which will be good for traders. However, volatility may not be encouraging to those looking to originate and warehouse loans for securitization.

Apr 12, 2010

Will CMBS Spread Tightening lead to Revival of CMBS Origination?

With the first multi-borrower CMBS deal getting priced at tight levels with heavy demand, and spreads for legacy bonds tightening rapidly, there seems to be a lot of optimism in the CMBS market. CMBS deals getting done is a good thing and shows demand for the paper. However, the fact remains that the deals done so far have been ones in which the issuing banks did not take warehousing risk on the loans that were securitized. CMBS will have truly reemerged when loan originators start taking warehousing risk. Otherwise, the bigger borrowers will be able to get financing but smaller borrowers will have a harder time getting financing.

Mar 21, 2010

Uncertainty in CMBS Workouts? Curious New Twist with Extended Stay

Extended Stay’s action last week to terminate its earlier agreement with Centerbridge Partners and Paulson & Co, and sign a new one with a group led by Starwood Capital, which agreed to invest up to $905 million, shows the uncertainty of outcomes in large CMBS loan workouts. Good news in this case was that the group led by Starwood Capital has agreed to invest up to $905 million under a plan which values Extended Stay at $3.9 bn, compared to the $3.3 bn that the company had put for itself when it filed for bankruptcy last year, and the $4.1 bn senior loan securitized in CMBS. Centerbridge and Paulson, and Cerebrus earlier, were the ones who made it possible for Lightstone group to put ESA into bankruptcy by indemnifying David Lichtenstein for violating his recourse guarantee on the loan to not file for bankruptcy. This story is not yet complete – the starwood deal still needs approval from the bankruptcy judge, and another higher bid is still possible.

Mar 15, 2010

Riverton Foreclosure Sale an Indication of what might happen to StuyTown & Others?

On March 11, Riverton Apartments loan, one of the first large CMBS loans to default in mid 2008, was sold in a foreclosure auction for $125 mm. Some see it as a positive that the price was 16% higher than the $108 mm value from the appraisal done in June 2009 since that suggests that maybe value estimates have become too pessimistic. However, the fact remains that the $125 mm sale price is 44% below the CMBS loan amount of $225 mm.

Many may look at Riverton’s result as an indication of what might happen in the case of Stuy Town loan, as there are many similarities between the two as both were NY apartment buildings purchased at the peak of the market with business plans based on converting rent-stabilized apartments to market rent. However, it will be important to keep in mind that there are significant differences between the two as well.

Mar 8, 2010

Separate Rating Designation for Structured Finance Securities: A Good Idea?

Fitch, Moody’s, and S&P have now all announced that they will have a separate rating designation for structured bonds, which they will start using this year. It doesn’t change anything else in the rating process, and will probably just do nothing more than cause confusion and create logistical issues for investors who will need to modify their charters to clarify if bonds with new ratings are included. Rating agencies will start adding ‘SF’ suffix to the ratings for structured finance securities by September. This is to satisfy requirements of European regulators. Reform in securitization markets is very desirable and needed, but if not done thoughtfully, it can be a negative rather than an improvement.

Mar 1, 2010

CMBS TALF: Is the Judgment in?

CMBS TALF has worked as it has brought spreads significantly in. However, it has not achieved its original purpose of restarting CMBS lending and securitizations. Legacy CMBS TALF program, scheduled to end in March, could end as scheduled, but the commercial real estate market still needs help to get the conduit market going. A modified TALF program geared towards restarting conduit program can be very helpful in making sure that the gains in spread tightening from the Legacy program are not reversed after that program ends.

Feb 22, 2010

Slower CMBS activity ahead?

With Legacy TALF coming to an end after March, DDR dropping its planned CMBS deal, and few new deals on the horizon, CMBS market may be headed for slower days. If lower activity results in more volatile spreads, that may not be good for the sector.

DDR was the first to do a new issue CMBS deal last year using TALF. The planned second $300 million deal was cancelled after it was able to raise $300 million by selling equity. Yet the fact that DDR preferred to raise funds elsewhere instead of a CMBS deal, does not mean that CMBS is not needed or that others will not want to take CMBS loans. If DDR had not been able to refinance maturing loans by doing its first CMBS deal in November, it would not have found the equity markets that hospitable.


Feb 8, 2010

Restarting CMBS Lending

Inability to hedge loans while aggregating a pool large enough for securitization is one of the biggest obstacles preventing restarting of conduit lending for commercial real estate properties. The problem is that Lehman & BOA CMBS indices that worked in the past are no longer appropriate for hedging, especially for new origination loans. Spreads on new bonds with newly underwritten loans cannot be expected to move in tandem with spreads on old bonds which makes the old bonds or indices unusable as a hedge for newly originated better quality loans. Originators want deals with new collateral so they can hedge, and new deals require originators to originate new loans. A new TRX index based on the three new CMBS deals can provide a mechanism for loan originators to hedge loans, and should also be attractive to the investors. It may not be as diverse as desired and may not be perfect, but the new index may be just the thing that lets at least some people move forward with loan origination.

Jan 25, 2010

Should Congress have more control over Federal Reserve?

The uncertainty on Ben Bernanke’s confirmation as Federal Reserve chairman for second term, and the resulting market turmoil, demonstrate the importance of independence of Federal Reserve from political influence. Till the democrat’s loss of senate seat in Massachusetts election, Bernanke’s confirmation was not in doubt. The election loss made clear the public anger at the current state of the economy, and led to some politicians withdrawing support for the chairman throwing his reconfirmation in doubt. Even many of his detractors credit him for helping bring the US economy back from the brink last year, but fault him for being part of Fed that promoted easy monetary policy for several years. US monetary policy, especially going forward, is likely to require some tough choices from whoever is at the helm at Federal reserve. Some decisions may need to be made that will not be very popular. Allowing the congress to have more of a say or control over the Federal Reserve, as some have proposed, will bring more uncertainty, and will eventually be more harmful to the economy and the main street.

Jan 18, 2010

Stuy Town loan has garnered more attention, but Extended Stay bankruptcy is more interesting

The Stuyvesant Town story has attracted more attention, but the Extended Stay bankruptcy story has more unusual elements. Last week, Extended Stay reached a preliminary agreement with Centerbridge Partners and Paulson & Co to provide a $400 million cash infusion to enable the company to emerge from bankruptcy, and judge James Peck gave them a two-month extension of the exclusivity period for filing the restructuring plan. This story includes the original reorganization plan, which was put together by the borrower and some of the investors throwing out the cash waterfall and procedures specified in deal documents and without consulting the trustee or the servicer, who are normally and legally the sole voices for securitization. It involves the investors agreeing to pay the borrower for losses from violating the pledge to lenders in loan documents to not file for bankruptcy. It involves a rival group with several current debtors fighting back with an alternate plan. It involves the Federal Reserve as a debtor holding $900 mm of debt, which could possibly take a loss.

If the plan is eventually approved, it will be a culmination of a long sequence of events starting with the top-of-the-market $8 billion buy-out of Extended Stay Hotels in 2007 by David Lichtenstein of Lightstone group, who contributed just $200 million of equity and financed the purchase by a $4.1 billion first mortgage and $3.3 billion mezz loan. In June 09, Extended Stay filed for bankruptcy and proposed a plan which may have resulted in Centerbridge and Cerebrus ending up controlling the firm. In September 09, a group including Starwood, Fortress, DE Shaw and Five Mile Partners proposed an alternate plan which has not gained much traction. The Federal reserve ended up holding $900 million of the debt resulting from Bear Stearns’ failure. In the bankruptcy filing, the company estimated its value at $3.3 billion, down from the $8 billion purchase in 2007.

Jan 11, 2010

Banks may be Facing a New Problem

Recently banks have been big buyer of Treasuries — that has been good for them, yet it can become a big problem very quickly. Depository institutions held $145 Bn of Treasuries as of June 2009, and that number is likely higher by now. With cost of financing near zero, a $1 Bn position in 10-year treasuries generates about $38 mm in coupon income annually.

A $1 Bn position in 30-year treasuries generates about $47 mm of seemingly risk-free income annually. However, if all rates rise by just 100 basis points, the $38 mm income turns into $85 mm loss, whereas the $47 mm income on long bonds turns to $145 mm loss pretty quickly. Group of six bank regulators jointly warned banks last week to be aware of the interest rate risks they face, demonstrating again that they have learnt from past crises. Fear of rising rates could lead banks to consider doing something other than buying treasuries with the money: perhaps like increasing their lending?

Jan 4, 2010

Regulatory Actions: Criticized but Eventually Positive for CMBS

The final version of the recently passed Wall Street Reform & Consumer Protection Act of 2009 (H.R. 4173) removed the requirement for banks to retain 5% of CMBS securitizations when there is a third-party B-Piece buyer doing due-diligence. This is a positive, but did not get much reaction from the market. Without this concession, combination of HR 4173 and FAS 167 would have been a self-inflicted fatal wound for new issue CMBS origination by banks. On another note, the guidance from agencies to make it easier for servicers to modify loans has been heavily criticized as extend-and-pretend or delay-and-pray. Yet, so far servicers seem to be handling extension requests in a prudent manner. Despite fear of misuse, giving servicers flexibility to avoid forced fire-sales is a positive step for the market.

Avoiding forced fire-sales seem to be a common unstated theme behind many of the regulatory actions in this crisis. Lack of these fire-sales has prevented asset prices from going down even more, and has frustrated many who have raised funds for investing in distressed assets. Many expect a repeat of the crisis of the early 90s when a lot of money was made by buying cheap assets sold by FDIC, but FDIC seems to have learnt from that experience too, as can be seen from steps like FDIC asking bidders to offer the agency a chance to profit if they benefit. Do fire-sales lie ahead or can they be avoided? Those waiting to buy cheap assets certainly expect that they will, but the authorities and the owners of these assets will try to avoid that as much as they can. What will happen? Only time will tell.

Dec 14, 2009

New Issue CMBS TALF – Not getting used much, But is still needed

Given that, of the $1.26 Bn in new issue CMBS this year, only about $80 MM was done using TALF, it might seem like an easy conclusion to reach that the CMBS market does not need TALF anymore, but that may not be the right conclusion. These deals have benefited from being the first ones after no deals for 18 months and the pent up demand from dearth of new deals. More importantly, these deals are single borrower deals where the loan originator did not take risk of bond spreads, which was borne by the borrower. Real test of CMBS market functioning well will be multi-borrower deals where the loan originator will have to take the execution risk on bond spreads. Those deals will take time and will need all the help they can get. At the end of the day, TALF acts as insurance, and is useful even if it is not used heavily.

Dec 7, 2009

GGP loan modifications – good news for CMBS, but a bad precedent?

GGP loan modifications agreed to as part of the reorganization plan seem to have more favorable terms for lenders than many had expected. Borrowers agreed to pay catch-up and additional amortization on all loans, agreed to pay special servicing fee, expenses, and a 100 bp modification fee, among other terms. That is positive as it removes uncertainty on 90 loans with $9.7 Bn balance, which move back to performing status, even though extensions will have differing impact on different bonds. However, the fact that borrowers were able to get loan modifications with extension of 5.2 years on average, may be setting a precedent which will make it easier for others to ask and try for similar extensions.

Nov 23, 2009

Misplaced Optimism from the DDR deal?

Pricing of the DDR deal at better than expected spreads is undoubtedly a positive for the CMBS market, but it may have resulted in some misplaced optimism in the market. DDR and the follow-up deals will be single-borrower deals. Hopefully that will encourage conduit lenders to start originating new loans at some point, and with lower LTV on new loans, these deals will attract investors, as clearly demonstrated by the pricing on the DDR deal. However, commercial real estate prices, as measured by Moody’s/REAL index, are down 42.9% from the peak and have now retraced all the price gains since Sep 2002. New loans will be based on these new lower values, and that would not be helpful to the legacy BBB and BBB- bonds. CMBX BBB and BBB- bond prices were up 1 to 4 points last week while AAAs were down slightly, but any optimism for those bonds from the DDR deal will be misplaced. Bottom of the stack needs to adjust, and senior bonds are still the best place to be in legacy CMBS.

Oct 26, 2009

Will Media Coverage of Peter Cooper Village/Stuy Town Make CMBS Losses more Likely?

Wide media coverage of the Peter Cooper Village & Stuy Town loan might make a CMBS loss on that loan more likely. Media has widely reported that the value of Peter Cooper Village/Stuy Town properties, which were purchased for $5.4 Bn in Nov 2006, is now estimated to be less than $2 Bn. Normally the low estimates do not matter. What really matters is the highest bid or the price one – just one – buyer is willing to pay. Valuation of properties like this is not totally a science, and it is entirely possible for one buyer to put a higher valuation on it than others based on their view of possible upside. However, in this case, such a wide dissemination and knowledge of the $1.8 to $1.9 current valuation numbers, might make it difficult for someone to put a higher valuation on it, even if they otherwise might have done so. With reserves running out, special servicer may not be too keen on taking over the properties. That will make it more likely that they will end up accepting losses on the $3 Bn senior loan, included in five different CMBS deals, and modifying it for whoever emerges as the new owner.

Oct 19, 2009

Solving the Chicken-and-Egg Problem is the key to restarting New Issue CMBS market

Originators want to originate new loans, investors want to buy bonds with new conservatively underwritten loans, Treasury & Federal Reserve want the new issue CMBS market to start, borrowers certainly want to take out new loans to refinance maturing loans, and yet, four months after the Treasury launched the program, not one new issue CMBS deal will have come to the market – highlighting the chicken-and-egg type problem that the CMBS market faces. Everyone knows that the new origination will be of higher quality and so should have tighter spreads than the legacy bonds. Yet, lacking an efficient hedge, all that the originators have for indication of spreads are the legacy bonds, which are still too wide for new issue deals. In other words, originators are looking for tighter and stable bond spreads to originate, and market is looking for new collateral for tighter spreads – sort of a chicken-and-egg type problem. One solution is to wait till legacy bond spreads tighten and stabilize, giving loan originators more confidence, but that might mean new issue TALF program may not get much traction before it ends. Another approach is to accelerate the legacy TALF program by removing some of the uncertainty that borrowers in that program face today. There are two easy to implement steps that will be helpful and allow investors to buy bonds throughout the month, rather than waiting till just before the TALF subscription date. First, the price used for calculating loan amount can be adjusted for interest rate movement from purchase date to the subscription date, and second, Treasury can allow potential borrowers to submit a list of potential bonds for purchase before actually buying the bonds, with approvals announced two or three weeks before the subscription date.


Oct 5, 2009

Re-Remics: Are they getting a bad rap?

ReRemic (also known as resecuritization) is instantly rejected in a knee-jerk type reaction by many people, but single-bond reremics are a useful tool. With single bond reremics, all you are doing is taking a bond, and splitting it into a senior and a junior bond. The senior bond is better than the original bond because it has additional support from the junior bond which will absorb any losses before the senior. For buyers, the senior bond would be less likely to be downgraded or face losses in future. It’s a simple process to do create this and a simple structure should not cost a lot. Reremics are just a tool, and can be useful if used properly.

Sep 14, 2009

Is the new TRX Contract Under-reported by Press?

The launch of the new TRX Total Return swap contracts on Thursday has gone under-reported by press, but has the potential to have a significant impact on CMBS trading over time. TRX will likely make it easier for dealers to hedge CMBS positions, and will provide some interesting possibilities to those who want to take a leveraged position, and others who have been active in the CMBX market.

The $716 MM JPMCC 2010-C1 deal that priced on Friday was a step forward for the CMBS market in several ways,” says  Malay Bansal, head of Portfolio Management and Advisory for Commercial Real Estate & CMBS at NewOak Capital, an asset management, advisory, and capital markets firm in Manhattan. “It is positive that most bonds saw good demand. From investors’ perspective, it is also good to see issuers moving toward lower LTV, higher DSCR, and in-place underwriting. The control shift based on appraisal reduction also moves the structure back towards what it used to be before the 2006 -2007 loosening of standards. However, pricing spreads were about 50 basis points wider than the RBS deal that priced in April, underscoring the fact that hedging loans while aggregating will be an important  for any prudent lender trying to close loans before securitization.

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