Guess Who's Back

Today seems like an odd day for the fringes of the credit markets.

1. First you have Hunter at Distressed Debt Investing who is basically decrying the current state of the HY markets as "out of control".
2. Second, you have Bloomberg writing a piece on CRE CDOs making a comeback.  But don't call it a comeback!  And honestly, don't you dare call it a CRE CDO neither, call it a "collateralized loan obligation".   
3. And then, like a phoenix rising from the ashes, the WSJ prints a piece that symbolizes the return of the B-piece buyer.  He's not trying to repack his residual holdings into a CDO anymore though; those days are long gone.  Eric Hillenbrand and his crew have turned a new leaf.  Welcome back gents and if anyone knows where Andy Stone has gone to, please tell him he is missed.

Usually my first instinct is to take the opposing view when the mainstream media prints stories of how a certain asset class is "toppy" but I just don't know what to believe anymore.

~Jingle Male

Bloomberg states that new issue CMBS LTVs exceed 100%

Of course if you actually make it to the 8th page of Ms. Mulholland's Bloomberg article...

Lenders use a different formula to calculate a property’s value relative to loan size than Moody’s, resulting in a lower leverage ratio. On a $1.35 billion offering from Morgan Stanley and Bank of America Corp. sold last week, the issuers estimated the average office loan in the pool to be equal to 65.5 percent of a building’s value, compared with Moody’s 109.7 percent, according to the rating company’s assessment of the transaction.

So Morgan Stanley and Bank of America are using appraisals, and Moody's is basically making up a number. It should really just say that at the very top of the article. Moody's takes two numbers to estimate their version of the LTV for a property, stabilized income (so not actual current income, which is what is commonly used in CMBS 2.0 appraisals, and even many CMBS 1.0 appraisals) and higher cap rates then the current or even near-term projected cap rates. While I'm not so naive to believe that appraisals are always accurate. However, it is equally naive (at best) and potentially dangerous for Moody's to imply that this is an accurate accounting of value. Last year, they had the nerve to actually state the following:

In contrast, Moody’s LTV highlighted the growing credit risk late in CMBS 1.0 and is much more consistent with the now evident performance patterns of recent vintages.

So, they would have you believe they saw the storm coming, but continued to rate the bonds exactly the same despite believing that the vast majority IG-rated CMBS they put their stamp on was underwater and would likely be downgraded?

I do believe that Moody's Stressed LTV is useful in analyzing loans in a deal, but it should clearly be labeled as such. In papers specifically about the measure, they label it Moody's Stressed LTV, and highlight that it may be useful in identifying potentially overlevered properties within the confines of a model. But they also seem comfortable with allowing a reporter to publish articles such as the Bloomberg article above and frequently will just call it Moody's LTV.

All is Lost!

From Bloomberg.

More than half of commercial mortgages packaged into bonds in 2007 and coming due next year may fail to refinance as maturities reach the most evah and lenders pull back, according to Standard & Poor’s.

Nearly 30% of 2007 CMBS loans carried 5 or 7 year maturities...

About $55 billion of property loans sold as securities come due in 2012, with $19 billion of those originated in 2007, S&P analyst Larry Kay said in a report today. The five-year mortgages have a 50 percent to 60 percent likelihood of failure to refinance, the New York-based analyst said.

Next year will “usher in the first major wave of maturities from the 2007 vintage, which were issued during a frothy period at the peak of the market,” Kay said.

Is the Wave of Mutilation finally upon us? Some say yes...

“Retrenchment in the capital markets and among other lenders in the third quarter of 2011, which has continued into the current quarter, dims the refinancing prospects.”

So, it's kind of a big deal - no money is being lent, the loans maturing contain more underwater crap than ever before, and any money that is being lent is under onerous terms :(

Loans underwritten during the peak five years ago will be challenged by tighter lending conditions, limited borrower equity in the buildings and the large size of loans relative to current property values, S&P said. Property values have tumbled 42 percent since 2007.

Lenders are willing to write a mortgage for a maximum of 70 percent of a building’s value, meaning about 63 percent of loans taken out at the height of the property market bubble will be hard to refinance unless the borrower injects additional cash, S&P said.

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...

CMBS in a Top Position when Risk-On Trade Returns

From Chris DeReza @ Bloomberg (sorry no link):

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"

NCREIF Cap Rate to Treasury Spread Update

This is a little "last week", but CREConsole did provide a couple of nice graphs (from Real Capital Analytics) to accompany the Bloomy article that was arguing Cap Rates current spread to Treasurys are a sign that you should invest in CRE... I don't agree with the Bloomberg article, to be clear, but the charts are still interesting.

PCV/ST Foreclosure rescheduled for September 8th

This came out Friday on BBG:

Aug. 20 (Bloomberg) -- Pershing Square Capital Management LP and Winthrop Realty Trust set a new date for a foreclosure auction on New York’s Stuyvesant Town-Peter Cooper Village after a judge halted a sale planned for next week.
The auction will take place Sept. 8, pending the resolution of a lawsuit brought by the property’s senior mortgage lenders, who object to it, according to letter filed in New York State Supreme Court today.
Pershing, led by Bill Ackman, and Winthrop had sought an Aug. 25 foreclosure auction after buying mezzanine debt on the property, Manhattan’s biggest apartment complex. Senior lenders filed a lawsuit claiming that the venture may not move to take
over the 80-acre apartment complex until the mortgage holders are paid the $3.66 billion they are owed.

Phew - it's all over, nothing else to worry about...

David Bianco, of the esteemed firm BAML, head of US Equity Strategy, informed us this morning (on our ride in on Bloomberg Radio, in between their primary programming that consists primarily of advertisements and PSAs urging us not to collect fire wood) that we're just in a Pessimism Bubble, and everything is really much better than you think. Get all-in on Equities or you're going to miss the boat.

On CRE, the interviewer (Tom Keene I think) asked "what are you seeing in CRE that all the pessimists are missing" (paraphrasing a bit). Bianco, "investors are willing to pay a dear price for income producing properties... even given the negative rent outlook, people are capitalizing income producing properties at very low cap rates... this is supportive of the loan book the big banks have of their big properties...", or something like that.

When cap rates get as low as they were, investors aren't valuing income, they're valuing speculation. I agree regarding the investment dollars chasing deals - you can't buy CRE in any form today without overpaying.

His entire interview made me more pessimistic on everything from equities to CMBS. I'd short BAC in response, but their "earnings" improved, mostly due to the Merrill acquisitions - ugh, I threw up in my mouth a little bit just now.

Bloomberg Radio Sucks

It's 50% advertisements (on Sirius/XM no less), 25% sports, 10% weather, and like 15% news - on a good day. I'd pay twice as much for one channel that was 100% news with a business slant - I thought that was their business model?!?

On a bad day, starting today at 2pm ET in fact, they're switching to 100% sports - golf no less. I'm not a golfer, so I'm biased - the last time I played was on the gulf coast in the 90s and I really enjoyed the cute girl who brought me beers, but that was it. That being said - HOW does one enjoy a good game of golf over the radio?

I spend more each month to receive Bloomberg information than any other news-like service, from various inputs including their desktop software, radio, and DirecTv for the office TV. I spend more on them than a lot of Americans take home in salary each month, and they deliver me Golf? Further, they no longer hire cute sales reps to deliver the message (much less a beer) - for whatever reason our Bloomberg sales reps are now just a rotating door of young guys fresh out of college. Something's got to give - bring back the old sales rep hiring model, get rid of golf and the deluge of book advertising on my f'in business news radio that I pay hard dollars for, or I'm going to quit paying so much to your firm!