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Dissecting JPM CMBS offering
Today Fitch issued last months data regarding delinquency rate in CMBS securities; and as you might have guessed; it is far from rosy.
Delinquencies on loans in commercial mortgage-backed securities continued to increase last month, mostly owing to a $1 billion net increase in overdue office loans. CMBS delinquency rates have continued to rise this year. Commercial-property owners got increasingly behind on their mortgages last year as occupancy rates and rents fell, driving property values down from highs during the real-estate bubble. Fitch said overall CMBS delinquencies rose to 7.97% in May from 7.48% the prior month. "As expected, office loan delinquencies have begun to increase and will continue to rise well into next year," said Fitch Managing Director Mary MacNeill. She added landlords are facing tenant downsizing, and in many cases, must offer significant concessions and reduce rent to maintain their existing tenant base. The hotel sector continued to have the highest delinquency rate at 18.63%, an increase from 18.42% a month earlier. Office properties continued to have the lowest delinquency rate at 4.59%, though that was an increase from 3.97% during April. The three other property types Fitch monitors--multifamily, retail and industrial--all saw their delinquency rates rise in May.
And with that in mind; there is this:
JPMorgan Chase looking to sell $716.3 million of bonds linked to loans on commercial properties, Bloomberg reports. The issue will be supported by 36 fixed-rate commercial mortgage loans backed by 96 properties. The securities will be backed by payments on the mortgages and not be an obligation of JPMorgan. The bank’s loan consists of 76.4% of the deal, while 21.6% of debt will come from Ladder Capital Finance, adds Reuters.
One of the traders working on the SP desk said "They need to get these loans off their balance sheet NOW!"; meaning that balance sheet tightening and further tightening of consumer credit will continue unabated; meaning further rise in REAL unemployment figures, declining properties values and all sorts of default in commercial real estate arena [I suspect bonds will be affected heavily [today's widening of the CDS spread in some Euro retailers suggests that may have already started] will ultimately affect munis power to service debt and affect the CE facilities [mostly private insurers]].
Wile JPM offering might seem alluring to some potential investors, the yield which JPM attached to the basket migh suggest otherwise. Some of you might remember that RBS conducted this years first CMBS deal by offering some of the debt in their portfolio with a yield of 90 bips. But many things have changed since April and JPM needed to up the yield on their offering by 21.7% in comparison to the yield on RBS 309.7 million worth of CMBS securities.
One might wonder, why would JPM offer such a high yield [on what is to be an AAA rated offering by Fitch], and there are several answers to that question; this being one of them:
Note the rapid deterioration in the price of REs starting sometime in mid April. While to the casual observer this might seem as a good enough reason why the increase in offered yield by JPM; there is another, more hidden and potentially more damaging reason.
Investors have their doubts regarding the value of the underlying loans; and judging by past experiences are unwilling to invest into CMBS securities unless the return on those securities is high enough to justify the highly risky exposure by engaging in such an investment.
But that is not all. The truth is; JPM offered such yield because it is selling a "black box". This offering can not be considered as anything else than a "black box" simply because; it is my belief; JPM does not have a pricing methodology available to assess the lemon cost of this deal. And by not properly assessing the lemon cost of this offering JPM is putting potential investors at a risk of a high loss, and in order to market this amount of securities it needed to increase the yield. It had no other choice.
This offloading of potentially toxic assets [let us not forget; the price of these assets is done using mark-to-model accounting practice] means only one thing; cleaning and tightening of the balance sheet. The reasons for doing so are listed above, so it is futile to repeat them once again.
If someone is in the mood of trading off of this; suggested trade would be shorting everything related to retailers and hotels [just don't do it if you trade on margin; do not gamble] and buying some CDS on CMBX [while the spread is still relatively cheap]. Probably going short some HY debt issued by those same retailers.
This also, probably, mean that the dollar will continue appreciating against other major currencies but will lag behind the rise in gold.
Godspeed and good luck gentlemen.
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Cheeky, et al.:
I don't know much about the current MBS market, but I do know something about real estate. I don't understand the conversation about legacy vs. CMBS 2.0. As far as I know there are no new CRE deals. No one is building. Thus, wouldn't all of these packages ultimately be legacy? Don't get it. What is the significance between re-writing old loans and calling them "new" vs. re-packaging old loans--on the same old property? It doesn't seem significant to me. I understand the relative tranche risk factors and the possibility that new loan terms would be more lender favorable than legacy loans. But isn't that just a factor of underwriting? It would seem the macro real estate investment risk would be the same regardless of the tranche or loan structure. I think Cheeky presents the CRE risk clearly and Boy C admits he wouldn't be a buyer. This deal is a shit piece with 78% LTV. Or maybe I don't know shit.
Fine article and conversation.
Hey Econophile
BoyC and I did not actually disagree on anything accept on loan vintages [but he set me straight there and assured me the loans were originated in the past 6 months; and I believe him since he is "on" this deal]. That said the only difference in legacy CMBS and CMBS 2.0 are the underwriting practices, collateralization techniques [ better said; overcollateralization], degree of leverage used and the structure of conduits [and probably some use of monolines for lower tranches]. The rest is the same.
We all agreed here that no one is stupid enough to buy into this deal; no matter how good the structure itself is. Your assessment of CRE market from a macro view is spot on; no one is building, buying or doing anything that even resembles business activity. IMHO; I think JPM [and RBS before it] are only trying to feel whether there is or there is not a pulse in this market. This is only the second deal related to CMBS this year [and in 2007 the total value of all CMBS deals was 218 billion].
Thanks for clearing this up. I recall that most toxic assets were overcollateralized as well.
Yes, some were, but not all. They changed the distribution models and [AFAIK] stopped using the Gaussian copula to predict the probability of default [for tranches as well as for the structure as a whole]. Also, instead of 5y10y they use swap rates as benchmarks etc etc. But as BoyC said above; its a highly illiquid market since not many know the differences between legacy and 2.0.
Also, the LTVs are lower, DCR is still hovering just barely above the breaking point. In short; its shit, but its less shit than the legacy ones. I still wouldn't invest in them. Not even in the AAA tranche [well not as a primary counterparty in that trade I wouldn't]. I would buy into AAA and AA tranches by going long CMBX.AAA and CMBX.AA if they break, or come close, to their historic lows. CMBX.AAA and AA were oversold and whoever went long in 09 probably discovered that years alpha. Even some Bs rallied over 100%.
08-Jun-10 Overview Index Series Version Coupon RED ID Price High Low CMBX.NA.AAA.5 5 1 35 137BENAE6 86.69 95.31 55.06 CMBX.NA.AM.5 5 1 50 19HGEMAE3 75.06 83.31 68.38 CMBX.NA.AJ.5 5 1 98 137BEKAE2 56.77 85.51 22.06 CMBX.NA.AA.5 5 1 175 137BEPAE1 41.71 80.95 12.84 CMBX.NA.A.5 5 1 350 137BEOAE4 32.71 79.65 12.62 CMBX.NA.BBB.5 5 1 500 137BESAE5 19.98 65.44 10.58 CMBX.NA.BBB-.5 5 1 500 137BERAE7 19.02 53.11 9.74 CMBX.NA.BB.5 5 1 500 137BEMAD0 5.00 40.52 5.00 CMBX.NA.AAA.4 4 1 35 137BENAD8 85.52 99.72 55.94 CMBX.NA.AM.4 4 1 50 19HGEMAD5 74.21 80.81 65.07 CMBX.NA.AJ.4 4 1 96 137BEKAA0 53.00 99.02 22.67 CMBX.NA.AA.4 4 1 165 137BEPAD3 37.17 98.47 12.93 CMBX.NA.A.4 4 1 348 137BEOAD6 30.94 99.51 12.70 CMBX.NA.BBB.4 4 1 500 137BESAD7 20.04 89.82 10.64 CMBX.NA.BBB-.4 4 1 500 137BERAD9 19.04 83.11 9.79 CMBX.NA.BB.4 4 1 500 137BEMAC2 5.00 65.73 5.00 CMBX.NA.AAA.3 3 1 8 137BENAC0 86.94 100.12 55.84 CMBX.NA.AM.3 3 1 50 19HGEMAC7 75.90 84.88 68.86 CMBX.NA.AJ.3 3 1 147 137BEKAD4 56.42 98.37 25.06 CMBX.NA.AA.3 3 1 27 137BEPAC5 35.31 100.18 12.68 CMBX.NA.A.3 3 1 62 137BEOAC8 26.48 100.89 10.95 CMBX.NA.BBB.3 3 1 200 137BESAC9 18.27 103.92 8.78 CMBX.NA.BBB-.3 3 1 320 137BERAC1 16.19 105.08 8.22 CMBX.NA.BB.3 3 1 500 137BEMAB4 5.00 101.40 5.00 CMBX.NA.AAA.2 2 1 7 137BENAB2 91.78 100.09 61.37 CMBX.NA.AM.2 2 1 50 19HGEMAB9 81.11 89.15 76.68 CMBX.NA.AJ.2 2 1 109 137BEKAC6 72.06 98.58 28.70 CMBX.NA.AA.2 2 1 15 137BEPAB7 52.04 99.64 14.75 CMBX.NA.A.2 2 1 25 137BEOAB0 41.88 99.20 13.75 CMBX.NA.BBB.2 2 1 60 137BESAB1 23.75 97.33 8.79 CMBX.NA.BBB-.2 2 1 87 137BERAB3 18.00 94.95 8.05 CMBX.NA.BB.2 2 1 180 137BEMAA6 5.00 88.72 4.21 CMBX.NA.AAA.1 1 1 10 137BENAA4 93.06 100.33 64.82 CMBX.NA.AM.1 1 1 50 19HGEMAA1 85.13 92.00 84.69 CMBX.NA.AJ.1 1 1 84 137BEKAB8 79.15 99.33 36.06 CMBX.NA.AA.1 1 1 25 137BEPAA9 65.06 100.60 19.92 CMBX.NA.A.1 1 1 35 137BEOAA2 53.29 100.54 16.46 CMBX.NA.BBB.1 1 1 76 137BESAA3 36.00 100.61 11.20 CMBX.NA.BBB-.1 1 1 134 137BERAA5 27.06 102.17 10.09
All in all if you had balls big enough and access to the market, and chose your trades carefully you could have easily be among top 5 performers. AFAIK; Gundlach made a killing trading CMBX. Someone left a comment about that a few days ago. I will try to mail Jeff to see if i can get the overall data on his trades. If I do get it; i will post it here. But he was up something like 300% [or something like that]. Insane trading skills.
Thanks for doing the work on this one Cheeky.
The difference between legacy and 2.0 is not the properties themselves (same old properties), its the leverage levels and corresponding valuations. Legacy loans are secured by properties underwritten with incredibly high rents tenants can no longer afford at 85% LTV on a 5% cap rate. 2.0 is underwritten @ today's rents (sometimes lower), 75% LTV and a 6-7% cap rate. The result is much lower loan balances - it is all part of the de-leveraging process for all global assets.
The point Cheeky and Reggie have been making is that even at these lower levels, if you believe that credit to businesses will continue to trickle, or even tighten more as QE is reversed/Sovereign crises worsen then you will see tenants continue to experience stress and attempt to renegotiate rents or break leases.
The fundamentals backing CMBS legacy loans were at the top of the mountain and fundamentals have since toppled...question is are we on the precipice of the cliff halfway down.
The CMBX trade has far more liquidity than the cash bonds but you still risk a liquidity crises in the market. There are many dealers out there who would love to sell total return swaps and go long on these CMBS deals but fear a liquidity run.
shorting hotels is completely absurd.
what the fuck are you trying to say in this post?
Still blown away that mark-to-model actually exists.
Brilliant and on-target post, Mr. Cheeky!
Only found one mistake: "mark-to-model accounting practice"
Shouldn't that be "mark-to-myth"????
Mucho thanks.
Too bad JPM can't..
http://www.youtube.com/watch?v=BwNrmYRiX_o
Miles,
Been trying to e-mail you at the address given but it keeps bouncing with a server error, which is strange for aol.com.
Can't log in to chat because someone is apparently going through a long peak of her menstrual cycle.
I am Chumbawamba.
Wow. I'm trying to wrap my head around the concept of a Mrs. Chumbawamba.
HA!
Though the person I'm referring to only wishes she could be honored with my cock.
I am Chumbawamba.
Now that's the Chumbawamba we've come to know and . . . well, know.
I was there when she proposed... :)
Chumb, your reply should be in.
Awesome, got it.
I don't remember any proposal. All I remember is the many times I was booted from chat. Or is there a connection?
I am Chumbawamba.
I still respect the difference between privacy & secrecy.. My hang up. We'll chat it laters brotherman.
Swaps +90-type pricing still seems too tight. At the market peak in 2006 AAA's were trading at swaps +27 and then blew out to swaps +1600 during the meltdown so they seem to have retraced a good bit. More than the yield, I am concerned with the collateral (mostly retail), high LTV (78%) and relatively low DCR (1.3x). Anybody buying the b-piece should be looking at this as a loan-to-own because I'd be fairly certain that over the life of these loans there will be workouts needed. For Fitch to even compare this to 2006 underwriting standards of 110% LTV's and 1.05x DCR's is ridiculous. I would pass on this deal. Highly leveraged retail pool with a $100MM loan concentration in Salt Lake? No thanks.
Lancaster just said going long AAA tranches [RMBS, CMBS] was probably the trade of the century. Basically shit like CMBX.AAA started to correlate with the movements in equities and made some smart fucker a billionaire.
CMBS AAAs with only 30% leverage exposure for 12-14% and 60% financing from TALF...that is the trade of the century.
Pimco, Blackrock, you are welcome.
Sincerely,
US Taxpayer.
What?
Bennie Bernank-ster Wasn't Buying at a Premium With Tax Payer Funds?
"And by not properly assessing the lemon cost of this offering JPM is putting potential investors at a risk of a high loss..."
So when was Obummer's frequent White House dinner guest Jamie D. anything but a used car (mortgage) salesman?
"What do we need to do to get you into a brand new CRE junk bond today?"
Strike 1: JPMorgan Chase
Strike 2: AAA rated offering by Fitch.
Strike 3: JPMorgan Chase
Jamie "Douche Bag" Dimon... you're OUT-A-THERE...
Where are the moralists who are berating home owners for not paying the mortgage? Or, for that matter, their student loans?
Business is business -- whether residential or commercial. Some notes just have more pages than others, but none have morality clauses in them.
As individuals (both human and corporate) all we can do is react with the power and tools at our disposal. Perhaps it's just a matter of scale. The underlying morality should be considered the same. The actions of specific humans should not be judged differently than corporate entities, be these judgments pro, con or indifferent. If the human action is bad, the same corporate action is bad, if the human action is good, the same corporate action is good. After all, in the eyes of the law, we are all the same.
Yep, the SCOTUS took care of that recently. BTW Marc, your comb-over really looks bad! I'm surprised that Erin has not commented on it on the morning gig.
mid april? thats the same time euro blew up for good. wasnt there a g20 meeting around this time as well?
A lot depends on the size and nature of the tranches. If it is 20% equity and 30% super-senior, that super-senior slice will still be in pretty good shape even if the loans as a whole go south.
Some of you might remember that RBS conducted this years first CMBS deal by offering some of the debt in their portfolio with a yield of 90 bips. But many things have changed since April and JPM needed to up the yield on their offering by 21.7%...
What's the weighted avg. maturity on the loans in this thing?...a few years at least I would think. Is that supposed to be 900 bips....as in 9% ?
Who would trade cash for an approx 1% yield backed by this stuff?
-Or is it 90bips (+21.7% north of that) +LIBOR? Still, that's a ridiculously low rate for the risk.
The 90 bps is spread over treasuries or swaps. So actual yield is more like 2.50-3.00% or something, this is on the A-1 tranche. RBS loans were almost all (if not all) 5 year loans. The b-pieces price in for yields closer to 7-10%
Thanks. I get the whole tranche thing I just wasn't sure what the benchmark rate was (one with expected rate movement over x years built in it sounds like).
Buying the loan(s) directly where you could better position yourself to get your hands on the collateral (and bid the appropriate cents on the dollar) is one thing but given what's happened recently I don't know why anyone would buy MBS unless they had to. Seems like you're paying for convenience and someone else making decisions for you.
It was above benchmark swap rate [RBS offering] and this one is also priced with yield being over benchmark swap rate.
Also, thanks for filling the blank about the pricing in. I thought it was understood that the yield was above xxxxxxx rate.
EDIT:
OT. See; this is what Im talking about. RBS Lancaster on future volatility in CMBS and RMBS.
http://in.reuters.com/article/idUSTRE6572OE20100608
BTW - Lancaster was on the panel at the presentation last week which talked about this deal. He seemed a very knowledgeable guy.
When asked why he robbed banks, Willie Sutton was reported to have said “because that is were the money is”. The bankers must have this concept in mind. Rob where the money is. However, Sutton in an interview reveled his true motivation----- and here we may get to the real reason of why banks rob people (beyond the money).
He said “"Why did I rob banks? Because I enjoyed it. I loved it. I was more alive when I was inside a bank, robbing it, than at any other time in my life. I enjoyed everything about it so much that one or two weeks later I'd be out looking for the next job. But to me the money was the chips, that's all."
Is there any intel on the loans? Are they new loans from JP Morgan? I know that Wells Fargo has been putting out new loans on Class A properties at loan factors of 9-12% this year in order to warehouse them and eventually sell them. Also the loan rates are around 6.5%-7.5% at LTV's of 55-65%.
I am familiar with the Gateway project and it will be hit with the adjacent Morman's Church's new $3 Billion City Creek retail and office development to be completed soon.
There has to be something to address the conduit market. We have reworked all our balance sheet loans, but have no clue what to do with the one remaining 10MM loan up in Nov 2011. The freeze in CRE continues unabated.
These are all new loans. Intel on the loans is put up after the bonds are sold, but they are also underwritten in the initial package. The b-piece buyer underwrites all the loans, and while in the past I question whether this really happened, I think the b-piece buyer for this pool will actually do it...if JPM finds one (they will, just at what price).
CRE credit markets continue to bifurcate into the doable and non-doable (much larger) categories. CMBS was starting to peek its head after RBS but JPMs troubles do not spell good news for it. Market still needs a hedging tool, clarification on risk-retention rules in the financial reform bill, and are still pissing their pants about what will happen with FAS 166 & 167.
They will find the buyer on their b-pieces, but yield will play a much smaller role here than with the a-pieces. My take is the price of the hedge/protection will be the most important part of whether or not the b-piece get successfully marketed. If JPM can find a risk/reward symmetry in CDS pricing they will sell it, if not; they wont.
IMHO, even going into CMBS right now is shear insanity, because all I'm seeing are bets that the $ will deteriorate against the majors or that the shitstorm which is brewing on the horizon will make the yields in IG corporate and sovereign to low to be worthy of investment. Also, If these are new issues as you say; I really dont know what to say about the issuers of said debt or JPM who put itself in front of a firing squad with the role of marketeer.
The risk/reward symmetry in CDS will not be there. There may be some correlation between legacy CMBS and new issue CMBS right now but it shouldn't last. CMBX and TRX are horrible proxies for the new issue CMBS (yes, I promise you these are all new loans).
The issuers are taking big risks taking these new issues to market and are massaging investors with all sorts of "investor friendly" provisions. My take is JPM botched this one by going higher leverage in the pool and having to market a b-piece. RBS did it right having the mezz outside the pool which added validity to the pool. Funds that pick apart the pool and buy the mezz help get the pension funds buying the AAAs comfortable with the pool.
BoyChristmas
I think Reggie is right. These are not new loans offering, but a refinance of old [and as Reggie said, most probably heavily underwater obligations setting on JPM balance sheet]. That is why the JPM guy in charge of marketing the offering said "They need to get those loans off their balance sheet". This are not new mortgages or loans, but something JPM probably has on the BS since 07 or maybe even 06 and is now refinancing and selling to investors.
OT:
Nice avatar; finally someone with the pic of the original [well not, but you know what I mean] Joker.
I like you pic as well.
While you and Reg are typically right, this time you are not.
I know for a fact the JPM pool is made up of new loans. $180M worth of it is from Ladder Capital which did not exist 10 months ago (ex-UBS guys). Also, I know the JPM contribution is actually new loans, I just know trust me.
Look, Im not on the inside and dont have the vintages of the loans which compromise this offering. So i will take you on your word and believe you. You have to understand me: I have a limited amount of data I need to work with here. So something miniscule can creep besides me sometimes. I just saw the participatory percentages and the natural conclusion was that those were the loans sitting on JPMs BS since 06, 07. I had no idea those were "new" loans.
Well thank you for the discussion and for the clarification. This was a pleasant conversation.
Also; FYI; I understand the structural difference between ABACUS and this offering. What i mean by "getting burned" was in the context of politics and populism. Nothing else.
Given recent history I don't blame you for coming to the conclusion; I just happen to be in the know this time around (usually I am not and look foolish). I see what you mean ABACUS and agree, JPM and others take a huge political risk by continuing to play in these markets.
Reggie, good point, a hit is a hit and investors only looked at credit (leverage) exposure rather than prepayment exposure...just like I just did.
That was one of the best rallies back to deuce I've read on ZH. Great tennis gents.
ditto. and nobody called anyone a nasty name. how refreshing.
tnx gentlemen.
yep
where do I go to learn to read good and do other things good too like you guys? How do I get smart about this stuff? Is the only way to get into the industry itself and get work experience?
Being in the industry helps but good reading material does too. A good primer is a start, finding an optimist and a pessimist is the next step. That way you hear how it should work and how it actually works.
Get all the education you want -- in the long run it boils down to opinion based on the murky "facts" that are available to you. Remember the fable of the blind men describing an elephant.?
Like I asked Cheeky earlier, these may be labeled as new loans but there is a strong chance that JPM is trying to refinance existing (and most likely drastically underwater) obligationgs. If so, the macro perspectives and outlooks remain the same and the only material difference would be the structuring of the loans. There really is no way to take the risk out of garbage without removing the garbage itself (ie the mezz portion).
In addition, many in the mortgage insurance biz back in '07 and '08 (think Ambac, MBIA, FGIC, and the smaller insurers) thought super senior AAA tranches would never get touched as well. They were wrong! Leverage is a bitch when the market dives 60%....
The super senior tranches on CMBS are not getting hit by actual losses. They are getting hit by market prices on the bonds or defaults/extensions that are delaying principal repayment.