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CMBS Bankrutpcy-Remoteness Issues Escalating
The recent ruling in the GGP bankruptcy case may open the door for a vast universe of structured CRE entities to funnel into bankruptcy court, making lives for holders of assorted CMBS securities rather interesting, especially after the recent unprecedented run up on hopes of governmental bail outs in perpetuity. After all there is only $3 trillion in max pain: a mere week's output for the printing presses at full throttle.
From yesterday's Wachtell Litpon opinion letter:
For better or worse, the GGP ruling may herald a trend towards bankruptcy filings by highly structured commercial real estate enterprises which today find themselves vastly over-levered. Indeed, GGP stands for the proposition that the protections against bankruptcy that were built into CMBS and similar structures are surmountable in certain circumstances: independent directors whose consent is needed for a bankruptcy filing can be replaced and can properly take into account the interest of the overall enterprise and the parent equityholder of an SPE; springing bankruptcy guarantees may be of little help if the guarantors themselves are insolvent or bankrupt or are protected or indemnified by some of the creditors (as proposed in the Extended Stay bankruptcy); and many of the “separateness covenants” applicable to SPEs offer little protection against a consolidated bankruptcy filing of their sponsor and do little to prevent the ongoing use of SPE cash during a bankruptcy (although there is no reason, yet, to think that they will not protect against “substantive consolidation”).
And more relevantly this:
The prospect of SPEs being included in consolidated bankruptcy proceedings will also raise issues not addressed in GGP, such as whether solvent SPEs will participate in an enterprise’s DIP financing, potentially structurally subordinating mezzanine lenders. Another twist may be the bypassing of the intricate consent and control mechanics in pooling and servicing greements, with CMBS certificateholders working independently of their servicers.
In a non-bizarro world, purchasers of AAA and lower rated CMBS paper from the willing desks of Merrill and Goldman might want to sit back and consider the implications. However, just like in the days of when S&P's models would ref out if you assumed a decline in prices, factoring rational thought is overrated in any investment decision. Which is why we suggest you ignore this post and any warnings in it entirely, and proceed to buy everything that the guy on line 2 is selling. You can always sell it back to him tomorrow for a higher price. Plus what is a bankruptcy other than just another overused 10 letter word.
hat tip Ed
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the rules don't matter anymore, chrysler, etc...buy AIG!
Yeah, this pretty much killed any future for a CMBS market as we know (knew) it.
brilliant prose...
The one with the escalating chance of bankruptcy is more likely me. I hope I can get some bailout chump change coming my way....Obama, you listening?
It ain't just real estate. The whole market is trading on zero growth, no earnings and deteriorating prospects. The stock market has always been a game of greater fools and bagholders.
don't blink if you are holding the bag.
freedoms just another word for nothin left to lose.....
http://www.rense.com/general76/lose.htm
"making lives for holders of assorted CMBS securities rather interesting".o.k. but who are those holders?frankly, I think they are mainly retirement and pension funds,who by the way will be very happy now that they recouped some of their losses. And are probably waiting for the s&p to double up so they finally can spend one year before eternity in a peacful retirement. -64
35754 - holders are mostly insurance companies, followed by the retirement and pension funds. Without looking at the data and trusting my faulty memory, the retirement/pension/public money manager's exposure to CMBS is about a third of the market.
250 Montgomery, SF, CA going viral thanks to Yellen and the 85 hit is a 60 paper transfer.
Some folks have forgotten where much of that CMBS $ came from. And it had nothing to do with pension funds or insurance companies. At least in the traditionally understood sense. Many of these folks expect a fee to transact their business. However, anything more than 3% will cause a primary source of international liquidity to evaporate in a most unpleasant way.
Rational thinking has little to do with it. This is strictly binnez and an empty handed bag man will not be understood or readily accepted running the great circle route. Fact of life.
Timmy, Bennie, Jamie, Lloyd and their international counterparts had best be coming up with the principal, as well they know. The aforementioned may run governments, but they don't run everything.
WTF spy AH?
People don't realize what a bid deal this is...it huge in the structured finance.....
When P/E ratios hit truly hilarious levels, remember folks, it's a "new paradigm", and shouldn't be judged by silly things like mathematics.
Without looking at the data and trusting my faulty memory, the retirement/pension/public money manager's exposure to CMBS is about a third of the market.
good articles; my newest bookmarked finance site ..http://www..
If the SPE issue is resolved in favor of GGP, that could mean a death knell for securitization. At the very least, it would markedly increase the risks for CMBS bond holders and prospective purchasers in the unlikely event that CMBS securitizations somehow start back up. This would basically make the entire universe of outstanding CMBS whole loans stranded on a desert island where maturity default is absolutely certain and no other alternative source of capital will ever be able to pick up the slack. How do you refi your shopping center when your existing debt was underwritten at 80% LTV, 30 year Amort, and 5.5% interest rate with no recourse? No bank or life company is going to be willing to match those terms, and since the deal had a 1.15 DSCR at underwriting, I'm pretty sure that a current DSCR on old CMBS terms of .85 won't attract too much attention.
Don't forget about the 3-5 years I/O, or better yet the 10 year I/O deals underwritten on an I/O constant in 06-07.
This is a huge deal, and while I know Tyler and many others get it, most people seem to have no clue about what a problem commercial real estate is and will be for the next 4-5 years at a minimum.
Many of these deals are zombie time bombs (I think that makes sense), floating along because they either cash flow or because the lender won't foreclose, but it's only a matter of time until the clock stops ticking and the bomb goes off.
To add insult to injury, the systemic risk that this places on the whole system will absolutely kill regional banks, many of which rely on CRE for their growth and income.
Don't tell Jim Cramer this though - he says the REITs are going up in price so the whole problem is "overblown". What a jackass. He should go spend the day in an HFF or Northmarq office and ask those guys how many deals they have done in the last year and what is in their pipeline - then ask them about the toxic deals they originated over the last 5 years.
New York Post: A bill winding its way through Congress proposes to prop up deteriorating apartment complexes by injecting $2 billion from the Troubled Asset Relief Program into an effort to stabilize multifamily properties in default or foreclosure.
The bill, which is called the TARP for Main Street Act and was sponsored by House Financial Services Committee Chairman Barney Frank (D-Mass.) and Rep. Nydia Velazquez (D-Brooklyn and Manhattan), would use TARP funds that have been returned by banks and plow it into programs that, according to the bill, would create "sustainable financing
" for the complexes as well as provide funding for property rehabilitation.
Property rehab circa 2011 = bulldozers
Buy CAT on the big dip.
yup thats how it is
hat tip to; finance news & finance opinions
ROFL... "only" 3 trillion in max pain!
Oooohweee, this is going to be fugly.
"Which is why we suggest you ignore this post and any warnings in it entirely, and proceed to buy everything that the guy on line 2 is selling."
Classic.
To add insult to injury, the systemic risk that this places on the whole system will absolutely kill regional banks, many of which rely on CRE for their growth and income.
good articles; my newest bookmarked finance site ..http://www..