Saturday, September 19, 2009

Rally fizzled on Friday - as it should...

The looser guidance of the IRS drove a rally initially, but I think the market will back up. It's like the market found out a girl that it was hot for had just decided to become a prostitute, and it got excited about the imminent action, but after a roll in the hay has realized it can never take her home to see the parentals. She'll still come in useful in the future though.

Things simply aren't good either.
  • had an article out summarizing the rating actions year-to-date: 3,405 CMBS Downgrades, Only 82 Upgrades. Keeping in mind that rating agencies are extremely reactionary by nature (rather than making calls on the future - just wait until we actually have widespread problems).
  • PCV/ST is defaulting imminently, along with a number of other high profile loans that are not cashflowing. I'm calling for a December default on PCV/ST with an over/under of 1 month - bets are now being taken.
  • European CMBS loans were structured in an inherently weaker fashion in many regards, but also have additional covenants that lead to defaults faster (to protect the investor). That market is unraveling a little ahead of the domestic market. Not too mention there was ruling recently in France that allowed a Lehman-owned office building to pursue a workout strategy - DESPITE the fact that the bondholders wanted to take over the already defaulted loan as would normally happen. They're rewriting contract law everywhere, to the detriment of real estate investors, it is not just a domestic issue!
  • The IRS changes its mind all the time. I'll bet a small sum that 10-years down the road we'll be able to look back and talk about a REMIC that was broken up because of some loan mod they decided they didn't like.
  • Not to mention that some current- and next-pay AAA bond holders are going to be up in arms over the new IRS guidance - They already are.
  • Will TALF new issue be successful? It has some draw backs that make it even less interesting to investors than the legacy TALF, which frankly hasn't seen much demand because it was structured so poorly (on purpose) by NYFRB.
  • If new issue TALF isn't successful, we're going to have problems. The first new issue TALF deal should be DDR's - they have $900mm CMBS loans maturing next year, and another $500mm in 2011.
  • CMBS maturities are nothing compared to banks/thrifts, but some REITs have a lot of CMBS mortgage debt to roll (I still can't believe that idiot, Cramer, would tell you to buy REITs right now). The ones with the largest maturities (all are >$500mm) next year are, in order, GGP, Vornado, DDR, Simon, Colonial, and Regency.
  • Looking at REIT CMBS loan maturities over the next 3 years that exceed $1 billion, you end up with a similar list: GGP, Vornado, DDR, Simon, Regency, and Brookfield. Brookfield is an addition to the list, and has the second largest maturity schedule ($3.6billion) due the mortgages it used in the Trizec acquisition back in 2006. It has another $2 billion or so of CMBS loans due after 2012 as well.

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