Write-offs grease wheels of CMBS: buyers of securitized debt re-emerge as crisis eases

Real Estate Weekly,  Oct 17, 2007  by Daniel Geiger

• E-mail
• Print
• Link

The backlog of loans that have been waiting on lenders' balance sheets to be sold into the securitized debt market as a result of the summer credit crisis are beginning to be cleared, lending experts say, in what is an encouraging sign for the availability and cost of capital.

"Last week and this week, there have been signs of life," said Patrick Hanlon, a principal at the capital advisory firm Ackman Ziff. "There was something around $365 billion of deals waiting, but about $150 billion of that has been sold off in the last few weeks."

Helping the activity has been the fact that many of the loan originators have begun to slash the price of debt backed securities, writedowns that have caused a number of prominent financial institutions, including Merrill Lynch and UBS, to experience third quarter losses but have stoked demand among bond buyers.

Equally as important is the way that the economy has seemed to dodge a recession. Economists had feared a slowdown given the way the pullback in credit, which hampers growth, dovetailed problems in the residential market, which many feared would hurt consumer spending.

But the Fed slashed interest rates, pacifying for policy action and jobs have, overall, remained strong

For a crisis that had largely psychological underpinnings, spreading quickly from subprime loans into other types of debt that hadn't had defaults, Hanlon said that there have been other resonant signs of the debt market's resurgence that have been like a tonic for investor confidence.

"People were excited when the Archstone Smith deal closed," Hanlon said, referring to the REIT that Tishman Speyer and Lehman Brothers recently purchased for $22 billion in one of the largest real estate buyouts of all time.

The buyers had delayed the deal from its original summer closing date in order to allow extra time to arrange the financing amid the crisis. There had even been speculation that the deal might fall through.

That the Archstone deal wound up closing at a purchase price that had been predicated on cheaper capital than what is now available has created the impression that real estate fundamentals continue to remain strong, Hanlon said.

"So far, all the fundamentals we're seeing continue to be positive," Hanlon said.

The hundreds of billions of dollars of loans collected over the summer when subprime defaults touched off a wave of panic among investors in all types of securitized debt. The bulk of the money is for private equity deals, which had been driven by the abundant flow of cheap capital before the crisis.

Commercial mortgage backed securities were vulnerable as well to the sudden risk adversity in the debt market over the summer because of the bullish underwriting that had gone into many of the loans.

Interest only debt and loans that permitted borrowers to assume negative carrying costs based on projected cash flow improvements became common types of financing as real estate values surged to record heights in recent years.

Such slack lending standards evaporated within weeks as the crisis began to bloom and during the dog days of summer, when the securitized debt market appeared to be completely frozen, finding capital even for conservatively structured deals was difficult.

"When you can't price the debt at all, that's death," Hanlon said. "Having the spreads widen isn't the greatest thing for borrowers, but it's not like having no debt for practically any price."

Now that bond buyers are again in the market for debt-backed securities, lenders are making securitized loans at modest loan to value ratios and wider spreads than in recent weeks.

"We expect that in the next weeks and months, as confidence continues to build, lenders will again start competing and spreads will compress and loan to value ratios will grow," Hanlon said. "But probably not back to where it was before the crisis."

COPYRIGHT 2007 Hagedorn Publication
COPYRIGHT 2008 Gale, Cengage Learning