Guggenheim partnering with DB and Ladder on CMBS deal coming in February

via CMA

Workout fees

DB is out today with a piece titled "We'll take 1% of that - Thank you" that puts the spotlight on the 1% workout fees that Special Servicer's get. The theme is that the fee is too high in some cases and they use an example where a loan was worked out in just a few months and had a minimal loss, but the fee was still charged as an example. Specials are definitely doing some things poorly, and in one case that I'm very close to, definitely did not act appropriately.

I am not as well versed in the Special Servicing world as I would like to be, but this reeks of the pot calling the kettle black and also is a pretty unfair point to make. I'm open to feedback here, but the Special is charging a fee that everyone knows about and they are contractually obligated to charge - why shouldn't they get it? If the workout went fast and resulted in minimal losses, let's double the fee to that Special Servicer because they are doing a great job!

Even though I am a former sell side guy, the audacity of a sell-side research analyst to come out and say that the SPECIAL is getting paid too much is almost too much to bear. We should count the ways that the sell-side takes their pound of flesh out of a deal, and in a much more opaque manner. I'm sure the Special Servicers of our little CMBS Universe are a little perplexed when reading this piece and wondering exactly how much they lost in their B-Piece portfolio on DB deals from '07.

Finally, people who run large organizations know you don't get a profit on every deal. If you can get a home run on one deal, it gives you leverage to salvage a later less profitable deal.

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.

Beacon and Seattle

Deutsche Bank had an article out early this morning (I was actually at my desk when it hit, which is unusual in and of itself, and it scared me when I got an email) on Beacon and Seattle.

It was very detailed and well done, and I'm not going to do it proper justice, but the basic premise was that the senior bond holders are not getting a fair shake - this loan in particular spans 6 different CMBS deals with projected shortfalls breaching the AJs on two of the deals. Noting in the conclusion that the sales prices on the released properties have exceeded $1.1billion, while less than $840mm of the senior debt has been retired.

CMBS Issuance to pick up steam in 2011

Nothing new here, but always good to see CMBS in the TOP news on Bloomberg.

Deutsche Bank and UBS are teaming up to issue as much as $2.5 billion in commercial mortgage-backed securities linked to loans on office buildings, shopping malls and hotels in what would be the largest offering of its kind since the market froze in June 2008, according to a person familiar with the deal. JPMorgan plans to sell $1.5 billion in similar debt, a person familiar with that sale said.

Parkus lands at Morgan Stanley

Richard Parkus, one of the few CMBS guys not to change seats over the last few years, finally jumped from Deutsche (-1) to MS (+1).

Defaults to increase in 3rd quarter

Housingwire reports

Analysts at Deutsche Bank found that the number of new transfers into special servicing will continue to outpace commercial loan workouts. But once properties are ready for liquidation, valuations on commercial real estate are missing the mark, according to Deutsche Bank. More recent appraisals are needed on these properties to narrow the gap between liquidation expenses and proceeds.

The analysts projected an 18% delinquency rate on CMBS.

There we have it - a realistic delinquency rate - 18%. I believe that number.

If you've been watching the MSM, the WSJ, CNN, Fortune etc. all had articles over the last couple of weeks talking about the "accidental recovery in CMBS", and shiny unicorns that shit rainbows that taste like skittles, etc. etc.

I almost sold all CMBS just based on the CNN article alone - they highlight Hartford for pete's sake. You see something that rosy, written by someone who obviously knows little about the world in general and less about CMBS, highlighting "good" companies that were really the "bad" ones - well, you just have to interpret the opposite of how they intend to get anywhere close to reality.

It's tough writing sell-side research all the time. No one really appreciates you internally, it's impossible to gauge your impact on revenues, you're underpaid, and everyone's a critic. People make mistakes too, and you have to forgive them the first time around although sometimes the forgiveness must be delivered in a very harsh shell so that the mistake is not repeated. I get all that.

That being said, Deutsche Bank's Frankfurth-based research group put out a piece on CRE yesterday title "Commercial Real Estate Loans Facing Refinancing Risks; CMBS only a part of a growing problem" that was really embarrassing for them in my opinion. The conclusions, the title, and overall gist of the paper is not incorrect - in fact, it's kind of obvious in the "duh, we have a refinancing wave coming in CRE both in the US and abroad!" kind of way. Hopefully after 3 years of this you're already familiar with the issue - probably more so than the authors at DB!

There is no flow to the paper. Its so bad that its hard to read. One paragraph is about the US, the next is Germany and the UK, and then there's something about Paris, and then you have to loop back and re-read the last three paragraphs to figure out what they're talking about. US CMBS and CMBS from the other side of the pond pretty different animals - and you can't switch back and forth between describing you're typical longer term fixed-rate US Conduit deal and a shorter term UK floating rate deal.

They go to some great lengths to compare ratios between the countries. For instance, they note that in Europe, CMBS only accounts for 8% of the CRE loans, while in the US the ratio is closer to 25%. Okay, what is that supposed to mean? Your Euro CMBS deal is full of short-term floating rate paper, your US is full of 10 year (mostly) fixed-rate paper. Your Euro CMBS loans are structured more like a US regional bank's CRE development loan than anything in the US CMBS market. They don't really come to a conclusion either way, but do infer that "risk of turbulence for CRE would be smaller than for housing" because fewer CRE loans were securitized. Also, without looking, they're estimate for the Resi market seems vastly incorrect.

Pages 5, thru 8 are just completely mind boggling. Under the section where they "define" CMBS, they start off describing a European structure and you assume they're purposefully not including US CMBS yet, then you start seeing a few references to US CMBS that don't show up in European CMBS, and you realize they've just mixed and matched the two as if they were that similar. Somewhere on page 6 it just leaves the realm of reality and I switched from reading to scanning.

Then there are sections just begging for some actual "out-loud thinking" on their part. On page 10 they discuss how 53% of US CMBS maturities in 2010 have extension options, but that percentage drops to 10-14% the subsequent two years. Do you want to know why? Well don't bother looking in the report. Maybe its obvious (it is to me), but I'm guessing if you ask the author, they won't know the answer. They come to the conclusion that things aren't so bad in 2010 - nevermind that the rest of the CRE mortgage market (the 75% that is not CMBS) is virtually all short-term debt maturing now - not in 2016 and 2017.

So, I'll stop picking on them. This is not the worst piece I've ever read, but it does remind me of a similar article in early 2008 when Goldman's Global (non-US) desk produced a report titled "US Commercial Real Estate: High Losses, Slow Burn" that was so factually inaccurate and so obviously authored by someone with zero experience in the US CMBS market that they later had to retract and republish an addendum piece (that still was unimpressive and full of errors).

Partial IOs - DB Style

I want to be very clear - I do not, have not, and never will work at Deutsche Bank in the foreseeable future. However, they issued a report today on Partial IOs, just a few hours behind my earlier post. Although their imagery is simply not as pretty as mine, they did have some interesting numbers.

Delinquencies are substantially higher on post-reset Partial IOs



, which is not unexpected, but still nice to see in a graph.

They also point out a few other facts, some of which may be obvious, but nonetheless:

• Virtually all Partial IOs remaining are 2005 - 2008 vintage loans.
• About 25-30bln partial IOs per year over the next 3 years. $80 bln total
  
• 2012 will likely be the hardest - virtually all of these are 5-year partial IOs from 2007 - yuck.
• Average increase - 21% (to my, roughly 20%)
• They counted 350 loans worth $5.3 billion that will reset with a <1x>
• $1.7 billion this year, $1.5 billion in 2011, and $2 billion in 2012

Their numbers agree with mine, its always nice to see your numbers actually match someone else that you respect. BUT, wow, their graphics guy needs a dose of caffeine. Their charts hurt my eyes.

CMBS In the News

The WSJ reports on 3 CMBS stories:

Notes the loan is going into a multi-sponsor deal slated for the 2nd quarter.

The owner of the Keystone Summit Corporate Park, private-equity firm Keystone Property Group, recently refinanced the building for $53.5 million, including a $41.5 million first mortgage from Deutsche Bank AG and a $12 million junior loan from Pembrook Capital. What makes this deal stand out is the plan Deutsche Bank has for the first mortgage.

First Ritz to ever default. Ever. Described by a former colleague as 45 minutes into the desert, the middle of nowhere.

The hotel's closure is the latest stumble for the Lake Las Vegas development, which was planned around a manmade lake roughly 15 miles east of the Las Vegas Strip. Developer Transcontinental Corp., led by Ron Boeddeker and Texas tycoons Sid Bass and Lee Bass, began developing the 3,600-acre project in the 1990s to include thousands of upscale homes, three golf courses, a small casino and two resorts. But Transcontinental defaulted on a $540 million loan from lenders led by Credit Suisse and sought Chapter 11 bankruptcy protection for the project last year..

Regarding the MBA default on their building, Petrie calls Kempner a dolt:

The worst part of buying "that stupid office building," Mr. Petrie says, was that it led to emergency cost-cutting that forced the MBA to dismiss some "wonderful people" on its staff. Mr. Kempner, who resigned in 2008, says the board approved the purchase unanimously. "It was not my decision," he says. An MBA spokeswoman declined to comment.

I'm not even going to do an outake of this FT story - the reporter did a poor job writing this up - but maybe this is of interest to someone because it has opinions based on a survey of how various markets will perform (including CDOs and CMBS).

Also in the FT, the Beltway Battle, discusses the attempted takeout by Brookfield for CarrAmerica's DC properties, that Tishman has defaulted on. I initially thought the article was talking about the CarrAmerica portfolios in BALL 2006-BIX1 and CGCMT 2006-FL2, but the addresses listed in the article do not match up.