Tuesday, November 8, 2011

Fitch - CMBS losses May Be "Manageable" 4% - 5% When Deals Mature

That's the Bloomberg headline, good for a laugh.

They go on to clarify that losses on all CMBS issued/rated prior to mid-2007 have been just 2.6% and will increase to 10.6% by maturity. I wasn't able to tie in the numbers from the headline to anything in the article, but double digit loss projections at least have the right number of digits...


crabsofsteel said...

Fitch is so stupid they should not be allowed to exist. Their ratings model rates super senior bonds and AMs as AAA even though interest shortfalls reach into the AJs. What a bunch of idiots.

Anonymous said...

Could you guys explain how this extension could be neg for credit but positive for IOs? I know every deal varies and so it depends on collateral and cashflows. Just curious:

for explanation. Corp N I
98) Options 99) Related Info BFW Nov 15 2011 10:50:47
CMBS Loan Move to Special Servicer to Help Some IOs: Barclays 91) ☆
By Christopher DeReza
Nov. 15 (Bloomberg) -- $482.6m Pacific Shores loan likely
to be modified and extended now, which might be viewed as a
negative for credit yet a positive for shorter tranches and some
interest-only classes, Barclays CMBS analysts led by Julia
Tcherkassova write in client note.
• Loan is backed by 8 buildings in Redwood City, CA suburban complex,
cross-collateralized and cross-defaulted
• Loan securitized in BACM 2007-1 (A1), GECMC 2007-C1 (A2)
• In addition to the first lien, there is a mezzanine represented by senior
($70.8m) and junior ($80m) mezz loans: Tcherkassova
• Trigger for special servicing likely pending maturity default: Tcherkassova

Dark Space said...

Generally speaking, and all else being equal, if you extend a particular loan's life and it continues paying 100% of interest longer than it was originally scheduled to pay interest due to an extension - then you've kept the IO fatter for longer. The fact that it had to be extended, again in general and all else being equal, generally indicates it was unable to raise equity or debt to get taken out at maturity.

However, that type of broad statement is should be suspect to the reader. Is the author talking about a WAC IO? Is the coupon on the loan larger than the WAC and is it even contributing, effectively, to the IO? Is the loan being extended because the entire market sucks and this particular loan is just an awesome credit relative to the rest of the pool?

Also, where is the investor's basis in said tranches? Why would the Pacific Shores loan extension be a positive for shorter tranches? Just based on your quoted notes from Barclays (I didn't double check her work) it is scheduled to pay down A1 and A2 of the two deals - if you bought those bonds at a discount expecting a huge paydown when this loan was scheduled to mature in January 2012, your IRR on your investment just got lower and it's going to take you longer to get your money back - perhaps that's an unrealistic example because it wasn't trading that cheap anytime recently, but you're right to question it. In fact, with no qualifiers to the kind of broad statements you quoted, I generally suspect that the "research analyst" or journalist did any real analysis on it at all. Maybe they did.

crabsofsteel said...

Never, ever, diss Julia.

Dark Space said...

I don't think I did, did I? I didn't mean to - for the love of god don't tell her that.

With absolutely no disrespect intended, I never have gotten a read on her. She could just as likely be raising cute fluffy bunnies in her spare time or spend her evenings carrying out some sick and twisted vengeance on some blogger who slighted her, maybe in a dark basement. Pretty much every other CMBS analyst I'm comfortable slighting in some way, knowing they will politely correct me or just call me names.

crabsofsteel said...

I didn't understand her comment about the extension benefiting shorter tranches either; it may be that she is assuming an additional equity infusion from the borrower but just didn't say so, or maybe they benefit from modification as opposed to losing credit support from foreclosure/liquidation. She sometimes makes these small omissions in order to get stuff out the door. You know that Julia was trained by Roger, who is the oracle when it comes to CMBS. The rest are not helpful, to say the least.

Anonymous said...

Dark Space,

As original Anon that is the response I was looking for. Thanks for breaking it down the way you did. The IO's benefiting from an extension make sense now; maybe I was too dense or tired to logically think through it.

I also understand why A1s and A2s could get hit due to "extension risk". Some concepts I picked up from a BofA primer I read a while back. Good stuff man again I appreciate the thought out response.

I'd like to see you guys post about AJ tranches in recent vintage (05-07) deals some day. I see a lot of talk on CRE Review about AJ's and I'd like to understand why all the "hype". Maybe because their value is so widely disputed?

PS - Your response has affirmed to never trust the sell-side for your research. Always rely on your own credit work!

Dark Space said...

CrabsOfSteel: I'm surprised the grammar isn't more heavily policed. I don't know if I'd call Roger an oracle, but he seems like a nice enough guy and well informed. ;)

Anon - Thanks. Appreciate the feedback. Happy to share sell-side research/primers, let me know what you need: credarkspace@gmail.com

I think the market's fascination with AJs has to do with the fact that they're a big chunk of the market (8-10% in recent vintages) and they're going to be the cuspy bond for some of the deals as delinquencies get up there past AJ territory. With prices between 30 and near-par there is plenty of room for investors to express an opinion.

crabsofsteel said...

Fitch awakens! After today's downgrade:


An entire world of credit all within a 9% difference in credit support. Genius!

Also, do read Roger's piece on non-recoverable loans. No one else goes there.

Anonymous said...

My guess: Extending a premium px bond can be good. Instead of getting paid off at par today, the new extended bond can be thrown on a bwic and get u paid a premium.