PCV/ST Deals Downgraded

How prescient. Deal Junkie brought a lengthy article on PCV/ST to our attention this morning, and by this afternoon Moody's had started it's wave of mutilation in CMBS due to the same transaction. The Aaa-rated AJ class was downgraded to A2...

Frankly, I don't think it was unexpected and I figured it was mostly priced in, but it is putting surprising pressure on spreads.

Seeing the Light - Lightstone and ESA

Not to pick on Lightstone, but you just can't avoid the bad press for too long when you make such poor business decisions. The Extended Stay transaction was bad when it started - they paid more than two times what Blackstone had paid for the chain just two years before for a limited service hotel chain.

However, the article seems off on a few points. The problems did not "arise directly from the weakening economy", although they were exacerbated by the economic problems.

One wrinkle in negotiations is that Extended Stay isn't likely to file for bankruptcy protection, because of provisions common in commercial mortgage-backed securities deals that would expose more properties of its founder, David Lichtenstein.

I'm not sure what misinterpretation McCracken is putting forth here, but the whole point of putting creating an SPE to hold your property is to avoid this situation. This is going to sound unintentionally snarky, but I really would like someone to explain what "provision" he's alluding to.

I do think the chain is going to get hit harder as revenues decline, but a foreclosure on the senior mortgage seems unlikely in the next 60 days. Instead, I'd look for the foreclosure to hit after the senior mortgage matures in June 2008 - although extensions are freely available, the chain is unlikely to hit performance targets resulting in a transtion to amortizing payments... at that point, it will not cover debt service on the mezz debt and if the economy continues on its path, the senior mortgage will not be far behind.

EVERYTHING is okay though, Fitch took a close look at it just 3 months ago and found nothing wrong with the transaction. Nothing to see here, please move along.

*I had no insight into what the WSJ was going to publish when I commented on the ESH transaction and Lightstone's recent default on the Burlington and Macon malls this past weekend - I just got lucky.

**Please excuse the overt sarcasm, it's hard to take some things too seriously when everyone gets it wrong, including the journalist "uncovering" the epic fail itself.

DBSI Bankruptcy - next CMBS headline

You already know about the DBSI bankruptcy earlier this month if you play in the CRE space, but the connection to CMBS hasn't really been broad market news despite a Moody's downgrade on the MLMT 2008-C1 deal (8% exposure to DBSI).

Bridger is advising, defaults & liquidations are likely, and losses are expected given the market. I haven't done the credit work necessary to make a judgement on how bad losses may be, though the properties may all be performing well and things may not be too bad - I have no idea yet. The Bankruptcy has its own blog, how hip is that - http://blog.dbsi.com/

Circuit City Bankruptcy

Nothing new here, but also not much of a chance for exposure. You can count the CMBS deals on your fingers and toes, and the only ones with significant exposure can be counted with just fingers. They tend to be in strip centers or in standalone stores (for some reason these seem to be horrible locations), which do not have any significant REIT exposure (DDR has a little exposure, but its not related to today's 25% decline in their stock).

I'm not sure exactly where they locked in their decision to fail, but it could have been in 2003 when they decided their knowledgeable sales staff were making way too much with the silly commission-based pay, so they fired them all and replaced them with your typical high-school grad (or not) working for an hourly wage, just long enough to find a better job, with no experience. The handful of these employees, bless their hearts, that survived enough to get some pay raises, were subsequently let go in March 2007 - again because they were paid too much. Purportedly, the same employees were asked to rejoin the firm just two months later after sales plummeted (whoa, the sales people were SELLING things? That's just crazy logic).

Management turned down multiple buyout offers and cobranding strategies, sold and allowed profitable lines of business to leave the firm, fired all the good employees, maintained horrible locations (even after the currently announced closures), and now they're in Chapter 11?!

Of course, this filing does let them reject leases in bankruptcy court, and is a negative for the CMBS deals where they reside, and a horrible negative for any employees that are left (take your severance and move on ASAP).