Moody's taking CMBS IOs to the finishing lot

Moody's announced it was planning on rating IO tranches to more accurately reflect the inherent credit risk in CMBS IOs. S&P took a similar stance in 2009, and Fitch started withdrawing many IO ratings in 2010.

If you're unfamiliar, IOs in the CMBS world are comprised of the leftover interest in a deal - in other words, the difference between the weighted average net mortgage rate and the weighted average coupon of the CMBS bonds. If the underlying mortgages have a coupon of 5% and the WAC of the CMBS is 4.75%, then there is a 25 bp excess interest cash flow that goes into the IO. This was sometimes split instead into a PAC and a support IO. The IO also typcially gets all or part of the prepayment penalties.

Because the cash flow stream is so thin and there is no principal cash flow to IOs at all, these typically trade in single digits regardless. But, there is roughly an IO notional balance that equals the total size of the universe (they quote $600bln in the sell-side research and WSJ articles, but they're missing big parts of the universe... likely Ginnie Mae Project Loan deals for one.).

Obviously this interest cash flow stream can be interrupted by prepayments, defaults, modifications, various fees, and ASERs. The rating agencies are basically conceding that when they originally rated IOs, they only measured ratings against prepayments and gave credit back for prepayment penalties.

Will this REALLY impact prices?
On the one hand, I would be astounded if a ratings downgrade that has been widely anticipated since at least early-2009 and talked about in years prior to the meltdown would force a massive sell off. Does anyone even use ratings any longer? On the other hand, it wouldn't really surprise me that something widely anticipated and expected still caused a sell-off in CMBS-land. However, IOs are already treated as non-AAA securities by many regulators and most investors, so we really need substantial downgrades (from AAA to nonIG) to force selling.

Although small and mid-sized banks are not big players in CMBS, there are some that are active and they probably will sell any IOs that fall below investment grade (even AAA-rated IOs are treated with the same risk based weighting as a BBB cash bond by the FDIC, so a single notch downgrade will not force the bank's hand).

Some institutional investors will have investment grade/non-investment grade criteria that still causes them to unwind positions as well. Insurers (the vast majority of the legacy CMBS investor base) are less likely to sell off IOs en masse, IMHO, though, because they already rely less on ratings than their new risk-based modeling performed by PIMCO and Blackrock. Mutual Funds on the other hand may be forced to sell off.



I pushed the button earlier, and it didn't do anything. I was tempted by the possiblities for days but was too timid at first, finally abdicating earlier today and smashing it down, only to be overwhelmed with disappointment.

Buy or Sell?
I for one hope it does cause a sell-off so I can pick up some IO bonds. I actually have bought a few (both off Conduit and Project Loan deals) over the last several years that have performed beyond my expectations. I'm still surprised, generally in a positive way, when I get a little unexpected cash flow off of one of these. The real hard part is buying them cheap enough - beat the hell out of collateral and still get really good double-digit returns (even triple-digit if you're lucky) - that hasn't been possible as much in 2011 as it was in the prior 2 years. Hopefully 2012 will give us some more good cheap pricing.

Where can I find out more?
One can derive the most entertainment and get the most information about this move by reading the overly sensationalized WSJ article on the matter, which misinterprets a sell-side research report (coincidentally? authored by a former rating agency analyst) from Deutsche Bank. BAML issued a report a few years ago that described them in detail, but I can't find it online (the image above is cut from it though). I'd be happy to email it to someone if they're interested, so just let me know.

We don't need your stinkin' money

The WSJ reports that BofA selling $888 million CRE mortgage portfolio:

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.

BOA says its time to buy CMBS

Alan Todd said Go Big or Go Home.

Not really, but he did say to cautiously and slowly add exposure at the top of the stack.

World Financial Center ($310mm)

Bloomberg had an article noting that BOA was only keeping 1/6th of the current Merrill space in WFC 2 and 4; it formerly occupied just over half the 8mm sq ft in the WFC complex. That's really not a big surprise. Building 1 is in CD 2007-CD4 ($310mm) and is currently fully occupied with one big lease (Fidelity National 13.06%) rolling in 2012, and I don't know their status.

Lehman moves to CS

Roger Lehman hopped to CS from BAML - are there any BOA or ML left at the new BAML?

http://www.prnewswire.com/news-releases/credit-suisse-hires-roger-lehman-as-head-of-cmbs-research-121337278.html

Comings and Goings

This regular update has become quite irregular, but there has been somewhat of a lull in action now that "everything is better and prices can only go up" again...

-Aegon said it will start contributing loans to BAML deal.

-Barclays is updating the Lehman Agg with a CMBS 2.0 group of indices meant to reflect the post-crash CMBS issuance.

-Are things better or worse? It depends on who you ask:

1. Ratings Downgrades slowed at the end of 2010 (S&P) - they include RMBS in the report too.
   
2. Moody's downgrades Billions of CMBS. (However, the author of this one also describes the downgraded transactions as "structures where the bookrunner is passing through mortgage payments to investors")
   

-Trepp had some comments out last week regarding the risk surrounding front-pays now that they are mostly trading above par while at the same time loans are being worked out more quickly resulting in some unexpectedly fast pay-downs, and losses to investors. They highlight the CSFB 2005-C2 WAMU Irvine Campus loan (Maguire) that was recently modified with a 45% write down, wiping out classes up into the G class. That same deal also has a $142mm Tri-County Mall Loan that is expected to further wipe out classes up into the C class. They go on to highlight the Springfield Mall ($156.9mm), which is expected to get sold at just $42mm (to its current owner, Vornado. It appraised in January 2010 at $31mm). Springfield Mall was split equally between CMAT 1999-C1 and NASC 1998-D6.

-Freddie Mac is reportedly planning to double it's K series issuance to more than $10 billion in 2011. K10 is expected in the first quarter, expected average size to be $1.2billion, 50-80 mortgages, include a B class. (source: Real Estate Finance & Investment; no link)

No Problems at Fannie & Freddie due to Multifamily?

The Wall Street Transcript had an interview with Michael Levy titled "CMBS Risk Even Fannie And Freddie Would Not Underwrite" that got picked up by a few outlets. They kind of glaze over some of the facts and imply that the Enterprises (or Agencies, whatever you want to call them) are not exposed to the multifamily in CMBS?!? Obviously, we all know that there was a directed tranche (A1A) in every Conduit deal that contained all the Multifamily loans, and it was solely purchased by Freddie and Fannie.

The fact they skip this little factoid makes you question the entire article.

A good example of that would be Peter Cooper Village and Stuyvesant Town - that was something that the agencies wouldn't issue a traditional mortgage for because it was underwritten with very little equity and at a relatively low debt service coverage ratio. That's really the prime example of where an apartment operator wouldn't go to Fannie and Freddie to get a mortgage at the peak of the market because they couldn't, because it didn't meet Fannie and Freddie underwriting standards. So they went to the CMBS market, and that's why, in my opinion, to some degree apartment CMBS has had weaker performance than non-apartment CMBS debt.

Uh, all the current problems aside, and even realizing that many (most) questioned the viability of the sub-1% cap rate trade of PCV/ST, the original LTV was something like 54% on the senior debt in question. That was not the issue. Further, guess who is exposed directly to the senior mortgage of PCV/ST, wait for it, wait for ... Freddie Mac and Fannie Mae, of course. They bought up the A1A notes on the CMBS deals that contain the mortgage.

So, let's leave aside their multifamily "portfolio" lending for a second and focus on their CMBS-like exposure. Freddie has a multifamily shelf called FHLMC Multifamily Structured Pass Through Certificates, off which they've issued $7.7 billion since late 2006, with $6.6 billion of that done since the crisis began (they just closed a deal this week run by BankofAmerillwide). Fannie has their DUS program (Delegated Underwriting and Servicing) - I don't know how bit it is, but I'll take a guess it is $50 billion-ish, and I'd be surprised if I were off by more than 20% (sorry not more firm).

Finally, let's look at their actual exposure to pure CMBS Conduit deals. Since 2003, virtually every Conduit deal had an A1A tranche that was purposefully designed and pre-sold to one of the Agencies. Guess how many deals Freddie/Fannie bought virtually all of the multifamily exposure (approximately 16% of the total deal size) from? 221 deals worth $562 billion dollars!

The current outstanding balance of the A1A bonds on their balance sheets is approximately $75 billion (the factor is just 0.90838 because most of the underlying loans have not started to mature yet). In all fairness, the A1A does have a 30% subordination, giving them additional protection as well.

The Enterprises were part of the problem. They deserve no slack, and you especially can't congratulate them for "avoiding" the problems with the CMBS multifamily mortgages, when they were the only two companies investing in them!

Bank of America, N.A. v. PSW NYC LLC

BOA sues Ackman and Winthrop for violating intercreditor agreement, calls them dirty rotten liars... Lawyers get richer, legal expense bill to Trust goes up, shortfalls coming soon.

(N.Y. Sup Ct.) Bank of America, N.A. v. PSW NYC LLC, Docket No. 651293/2010
(Aug. 18, 2010)

Running Aground

The BOAT (aka One Bryan Park, Bank of America Tower) debt is finally being marked by BAML and JPM as a $650mm 10-year pass-through. They'll also issue a $650mm 2010 Liberty Revenue Refunding Bond split into a $351.6mm Class 1, $87.1mm Class 2, and a $211.3mm Class 3.

It's structured as an ARD, and refinances the existing debt + $25mm that's being used for "general corporate purposes (but don't focus on that, just trust us)"

$1.28 billion CMBS loan in the works

The $1.28 billion 10-year balloon is reportedly close to being done.

Bank of America will refinance the 51-story office tower it co-owns with the Durst Organization on Bryant Park with help from J.P. Morgan Chase & Co., sources close to the deal said.

The refinancing comes a mere 10 months after the owners refinanced the Bank of America Tower at One Bryant Park with a $1.28 billion, three-year loan. Sources say this time the owners are seeking a 10-year loan for $1.3 billion that will be partially securitized and sold to a variety of investors.

Maybe there was some concern that is beyond my scope of reasoning, but why is JP underwriting this loan when the building houses most of BOA's CMBS operation? I have some thoughts on the matter, but will leave it open for discussion...

Are there any legacy BOA employees in the BOAT?

One Bryant Park lost another 1/2 dozen legacy BOA traders and salesmen from their structured products group since the start of the year. They may now have completely wiped out the entire seasoned and successful team that was there... It's really a lose-lose for all parties.