FINfacts Newsletter XVII-38

By Nick Silbergeld

Capital Markets Snapshot On the heels of the DDR and Fortress CMBS transactions, JP Morgan announced they would be taking to market a new CMBS offering backed by retail loans sponsored by Inland Western Retail Real Estate Trust. While the pricing has not been finalized and the loan to value ratios are not yet known, the properties backing the loans are relatively similar to the DDR assets and pricing is expected to be comparable. These three recent CMBS transactions have varying types of sponsorship; a large publicly traded REIT, an alternative asset manager, and a private REIT. It will be interesting to see how the corporate structure of the borrowing entity, as well as the type and quality of the assets backing the loans, affect the selling price of the bonds.

Last week General Growth Properties (GGP) filed a reorganization plan in bankruptcy court and announced they had reached restructuring and extension agreements with lenders and servicers regarding $9.7 billion worth of securitized mortgages on 92 properties. At the initiation of the bankruptcy, the major concern of market participants stemmed from the possibility that GGP would ask for substantial consolidation of all assets filed in the bankruptcy, effectively destroying the sanctity of separateness inherent with CMBS ownership structures. Many have said such a move would deal a major blow to the revival of securitized lending. With no substantial consolidation occurring, the result looks as though it will be far less dramatic and the most significant outcome will likely be stricter language regarding cash management systems and recourse provisions.

Commercial real estate and CMBS industry trade groups have pressured legislators into backtracking on new securitization rules included in the larger financial market reforms. Initial legislation included a rule requiring CMBS, and all securitized lenders, to retain a 5% risk exposure to a securitization transaction. CMBS participants complained the legislation had no clarification as to what portion of a CMBS transaction must be retained, and that CMBS needed differentiation from other securitized products. Legislators responded by increasing the retention requirement to 10% causing an even louder outcry from the industry. Legislators have now drafted an amendment allowing CMBS originators to opt out of the retention requirement and sell the reintroduced 5% exposure to a qualified third party investor. It seems as though a new mechanism encouraging more prudent loan underwriting initially insisted upon by regulators will not be part of the CMBS reform.

Industry participants are also starting to catch the ears of regulators and legislators regarding the new accounting and capital adequacy rules due to take effect at the start of the new year. FAS 166 and 167 were set to bring billions of dollars of securitized assets onto the balance sheets of some of the largest financial institutions and looked to be a roadblock for the resurrection of CMBS lending. Now, regulators are entertaining the idea of “phasing in” these assets onto the institutions’ balance sheets in order to ease the pain of committing more money to maintaining capital levels. The hope is to allow these institutions to provide the market with badly needed liquidity in the short term, giving them time to raise capital and devise solutions to handle the new accounting requirements.