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Sept. 26 (Bloomberg) -- As Treasury yields hit new lows, investors should see even greater value in CMBS spreads that still provide one of the highest AAA-rated yields available above 3%, Amherst debt analysts led by Darrell Wheeler write in client note.
- CMBS AAA legacy spreads have given up most of 2011 rally, moved from S +175bps to +325bps
- Have underperformed IG corporate spreads that are out only 15bps in second half of 2011
- This is relative to CMBS AAA widening, which is more in line with riskier high yield spread widening of 196bps: Wheeler
- Buying earlier last week suggested investors are questioning how much European crisis should affect U.S. economy
- "When investors start to move money from the sidelines and back into risk assets this dislocation should put CMBS bonds at the top of the shopping list as they provide one of the last remaining relative yields in an uncertain economic environment": Wheeler
- 30% enhancement of legacy deals withstands default scenarios in any double dip recession projection while “simplicity of the credit math is compelling"
A venture of Square Mile Capital Management LLC, Invesco Ltd. and a fund managed by Canyon Capital Realty Advisors LLC is buying the portfolio, a mix of performing and nonperforming loans tied to 32 properties, the person said. The buildings include the eight-story Renaissance Centre office building in Wilmington, Del., and the Bank of America Tower in St. Louis, which is not owned by the bank.
The buyers have been active lately: New York private-equity firm Square Mile recently was part of a team that bought a 4,700-unit distressed apartment portfolio in the Midwest, while Dallas-based Invesco in June bought into 230 Park Ave. in Manhattan, an office building.
Goldman and Citigroup increased the size of the deal to $1.7 billion from $1.5 billion, and adopted a far more conservative structure for it than in July. The deal includes 30% credit enhancement for senior investors--or 50% more than dealers offered and investors accepted in July--meaning more than one-quarter of the issue would have to default before the top holders experience any loss.
Five Mile submitted a preliminary nonbinding offer for Innkeepers earlier this week to acquire its 64 remaining hotels, the people said. The offer is slightly higher than an opening bid Five Mile and Lehman made for Innkeepers in a May bankruptcy-court auction. Since then, the two sides have been negotiating terms. The deal consists mostly of assumed debt and converting debt to equity, the people said.
Under the broad contours of the proposed deal, Five Mile would assume a substantial portion of Innkeepers's senior mortgage debt and, along with investment partners, make certain cash payments to creditors.
Those investment partners are Starwood Capital Group and Hersha Hospitality Management, which both would end up owning a piece of Innkeepers, people familiar with the matter said. Hersha, a hotel-management company partially owned by Starwood, would manage the properties for the ownership group, one of the people said.
Lehman would convert a chunk of its mortgage debt to ownership stakes in Innkeepers. Some of the remaining mortgage debt would be paid back, people familiar with the matter said.
Overall, the assumed debt, conversion of Lehman debt to equity and other cash contributions bring the value of the deal to more than $1 billion, the people said.