Markets Start to Settle

Markets Start to Settle as Some Liquidity Returns, CMBS Lenders Price Cautiously, Spreads Widen, Rate Floors in Place as Coupons Disconnect from Treasuries and Swaps: Treasuries: The 10 year T closed this week at 4.58% as bond buyers price in more Fed rate cuts. The 5 year T is at 3.79%, lowest since 1963. Why? Continued evidence of weakness in the U.S. economy. Adjusted 2nd quarter GDP was announced: an anemic 0.3%. Consumer confidence index fell to 81.8, lowest since 1993. Meanwhile, inflation remains tame (GDP deflator: 2.1%) and should remain so as energy costs drop and consumers rein in spending. As layoffs mount and unemployment claims surge, watch for the Fed to take action. Bond Market: All fixed rate instruments (corporates and CMBS) face stiff competition from a $5 billion offering from Bristol Meyers, one of the few AAA rated corporations. That issue is expected to price tight as buyers continue a "flight to quality." Most corporates have stabilized slightly after widening 25-40 bps last week. Swaps: Swap rates narrowed to T+66, the tightest in years. As borrowing costs continue to fall, prepayment is occurring across the board especially in the massive single-family mortgage market. The large SFR lenders have created an artificial demand for Swaps in order to hedge against the prepayment losses. Other factors include the perception that the present Treasury bond scarcity will relax with heightened government spending, thereby raising yields and narrowing future Swap spreads. Bottom line: Treasuries and Swaps are "disconnecting" from mortgage rates.

CMBS Market: Some lenders are committing and funding. Spreads have widened 20-30 bps. However, with the drop in Treasuries and Swaps, floors are in place. Typical floors are 7.00% for apartments (6.80% for low leverage), 7.25% and up for C&I. Rate locks: Some lenders are locking with no regard to spreads. They are offering an absolute "all-in" rate lock at 7.00-7.50% depending on transaction specifics. Many lenders are advising borrowers near funding to hold off until the market settles, or requiring more diligence. Loan Officer: "We can go to committee for approval now, but I suggest you wait a week or two and the loan terms should be more favorable at that time." No standard conduit pools have gone to market and a large "overhang" is accumulating. Secondary trading has widened further, with bids outpacing buyers (i.e. several bond holders are offering to sell with few buyers). Last week, 10 year AAA traded at Swaps +52-55, now Swaps +60 (pre WTC was Swaps +45). Consensus is that the first few pools should price AAA's at Swaps +60-65. One fixed rate pool of all large loans ($1.6 billion, 11 properties) priced AAA's at Swaps +77, 32 bps higher than expected (traders see 20 bps due to the market and 12 bps due to large assets being out of favor post WTC). Note: A large Manhattan office property was removed from the pool just before going to market due to investor concerns. However, lenders were encouraged by the fact that there were buyers for all bond classes albeit at higher spreads. October is going to be a huge month with $10.0 billion going to market. Stay tuned…

GSP/Rifkind Capital Advisors Closes $13,000,000 Land Loan, Silicon Valley: GSP/Rifkind, the asset based, quick-close solution provider, announced this week that they have closed a $13,000,000 land loan for a developer in Silicon Valley. The transaction was completed in 2 weeks from start to finish. The loan had several purposes: (1) Refinance maturing debt: Market uncertainty and raw land use made this very difficult do with an institutional lender; (2) Restart release prices: The loan was customized to allow a release structure on individual parcels, which allows the developer more flexibility in a difficult market. Loan Term: 1 year. Loan pricing plus extension terms: Call for details. (David Rifkind, David Ellis)

$5,325,000 Cash Out Refinance for Southern California Indoor Swap Meet! GSP has arranged non-recourse financing for these two contiguous special use industrial buildings. Both are master leased to an operator who then sub-leases tables/booths to individual merchants. There are four years remaining on the lease. These merchants ply their wares at a weekly swap meet. The two generic warehouse buildings lack standard industrial amenities, such as loading bays, dock levelers, roll-up doors or office buildout. The early 1960's vintage property was refurbished in 1986 specifically to accommodate the swap meet use. Financing Challenges--Solutions: (1) Single tenant, non credit, short-term lease--Lender became comfortable that tenant was well established at this location and operating at near capacity; (2) Non-traditional use--Generic building structure allows for easy conversion to standard industrial use; (3) Environmental concerns from previous use (possible underground tank with no documentation of removal)--Phase II radar detection confirmed no tank; (4) Low appraisal--Lender documented the loan request approximated the land value and extended their LTV requirement without eroding proceeds. Background: GSP solicited bids from 12 lenders (both portfolio and CMBS), only one would consider on a non-recourse basis. GSP established this borrower/lender relationship 5 years ago and this is the 3rd transaction funded. Terms: (1) Rate: 6 month LIBOR + 2.10% (6.95% floor); (2) Term/Amort: 10/25; (3) LTV: 62%; (4) DCR: 2.0; (5) TI, LC, Cap Ex reserves: None; (6) Non-recourse; (7) Lender Fee: 1.0%. (David Stepanchak, George A. Smith)