This page has been archived and commenting is disabled.
More On Substantive Consolidation Of REITs And Other Bankruptcy Issues Facing REITs
Some more very critical observations on how the future wave of upcoming REIT defaults will play out in bankruptcy court. While Wachtell Lipton has had numerous previous discussion about the threat of substantive consolidation for what have been previously considered bankruptcy remote SPEs (many of these being posted on Zero Hedge), other risks including priming, cash collateral, cram up and timing, have gotten little exposure. In the letter below, the law firm provides additional observations on just how all these may play out over the next 3-4 years, the period where massive CRE refis are expected to test purported second leg of the pervasively discussed V-shaped recovery (the fact that it is driven purely by massive global stimulus spending which is gradually being cut off, is for the most part, irrelevant).
As many REITs have so far avoided the fate of GGP thanks to massive equity infusions courtesy of underwriters such as Merrill Lynch which have done the most aggressive reverse inquiry follow on barrage in history, the only precedent so far has been General Growth, as such it is useful to observe the daily occurrences in that bankruptcy case as a roadmap of what to expect. As Wachtell says:
In GGP, the debtors did not prime the liens of prepetition lenders but did, after a contested hearing, receive permission to upstream cash generated at SPEs. As adequate protection, the court granted the SPE lenders, among other things, liens on the intercompany claims arising from the upstreamed cash. However, while the intercompany claims have priority status (and need to be paid back in full before any unsecured creditor of GGP can receive any recovery), the ultimate ability of the parent to repay these intercompany debts depends in part on the excess value of the SPEs themselves, which remains to be seen.
Indeed, one can only have a disconnect from fundmanetals for so long. At some point cash will have to be there to satisfy ongoing claims, and while hope can push the boat for so long, as some point actual cash flows to the various stakeholders will have to become apparent. Alas, mere "walks around town" demonstrate an acceleration of store shuttering trends, and thus, cessation of rent payments. Absent subsidies by the government directly into rent-replacement schemes, this issue will become more and more critical, especially as cap rates in New York and other cities gradually ramp up, now at 8%, and soon likely much higher.
»
- 5484 reads
- Printer-friendly version
- Send to friend
- advertisements -
They keep talking about all of the cash being used to buy up this junk properties. Why would they reduce cash and add more bad properties?
twisted logic
right again
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Doubling down
I have taken the bet that pigs don't fly a few times now (commercial real estate & financials), you know because of the fundamentals that they don't have wings. But that is not stopping them from being launched out of Ben Bernanke's liquidity swine cannon.
Only the insiders and mentally deranged that would "invest" in these businesses are making any money (the first through corruption, the second through luck). It's like beating the class bully at chess and then having the bully beat you up and steal your lunch money.
There is nothing more frustrating than making a sure bet, having the rules changed in the middle of the game with mark to fantasy, banning shorts, having banks postpone foreclosures and not recognize them on their books, having companies exempted from GAAP requirements with the executive order, then bailing banks out to have them turn around and report record profits, and being told I am sorry but pigs do fly...and it's gone.
The only thing we should focus on is what does the Fed and what does Goldman Sachs need/want to have happen - how do we place bets on the house?
Don't forget TALF for CRE; that one really burns me. So I'm going to pay for CRE losses not only with my future taxes, but also with the losses taken on various puts...
Well said. I'm following Bob Janjuah's advice - get out if there are four consecutive days above 1022 - market's going to the moon with grave consequences further down the road.
Place bets on the house?? Although I like `making` money as much as the next guy, placing bets on the house just strengthens their actions. I`ve taken some beatings on SRS, but am nowhere near changing sides and supporting their bullshit road-runner economics. Place bets on the house.... Let`s burn it down instead. This whole thing seems like a pump and dump to me. I`d rather bet on it going down.
If it is a pump & dump, then you would want to bet with the house by being in cash and gold, and then waiting to scoop up assets at pennies on the dollar - the same thing they did in the first depression.
American Bankers Association, 1891, as printed in the Congressional Record of April 29, 1913 On September 1st, 1894, we will not renew our loans under any consideration. On September 1st wee will demand our money. We will foreclose and become mortgagees in possession. We can take two-thirds of the farms west of the Mississippi, and thousands of them east of the Mississippi as well, at out own price... Then the farmers will become tenants as in England.
President James Garfield: Whosoever controls the volume of money in any country is absolute master of all industry and commerce... And when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.Now, if you own a printing press and can compete with digital zeros and ones I can understand your point. If you don't then I would try to bet with the house, or you risk losing yours.
I have only begun to understand the meaning of the name of this site - no asset is without risk (No bank would lend to FDIC based on its revenue and exposure) even cash is at risk if the government was to only rely on the FDIC as its vehicle for insuring deposits (I hope to God they stand behind all deposits regardless of mechanism). Gold may also deflate somewhat in the short term if the dollar strenghens, longer term it should strengthen with hyper-inflation especially if entities take physical delivery. So you see, unless you know where the big money will flow you could have your purchasing power wiped out without doing anything.
Couldn't agree more. My debate is how much to keep in gold mining equities in the retirement accounts (ones that do not need more financing, that is).
Well said. I'm following B. Janjuah's advice - get out after 4 consecqutive days above 1022. The market is going to the moon in that case with grave consequences further down the road.
If SPE's aren't able to be kept completely separate then they're unfundable and REITs are only fundable at the parent level.
Maybe ML can keep pumping out equity with no-one caring about dilution, but lenders are going to be paying attention to total group cashflow for every loan and since they are already lumbered with a lot of assets that aren't exactly fountaining cash, they're unfundable. After all ML didn't raise that equity to enable the REITs to capitalise on wonderful investment opportunities, but to pay off their existing loans (to ML and BoA mostly, coincidentally)
This could kill the dream of the big REITs that they'll relever to buy up distressed assets and use those new assets to cover the losses on their existing.
They won't be able to grow their way out of trouble as they won't be able to keep the new funded vehicle separate enough from the old crap they're trying to grow over to be able to get the leverage to make RE yields work.
With no leveraged buyers, oops their existing portfolio takes yet another hit
I walked around the town pretty much 24/7 from thursday - sunday. I was stunned by the amount of vacant retail space especially on madison ave.
Notwithstanding, the miley cyrus wannabes (after all what parent wouldn't want their kid to idealize a 15 yr old who's claim to fame is being this years disney virgin (stripper pole and all)) in line to get into ANF the actual stores throughout the city were not that busy (of course it is august so the locals have fled). The high end retailers are reducing fall inventory levels by 25-30% y/y. Mid-level by 20%. When i talked to employee's at several stores they all complained about their hours STILL being reduced. while all said August is busier than July (weather perhaps?) , they also admitted that receiptsfor their stores were still down on average 20% y/y/. Of course, all of this is anectodal, and thus subject to heresay rules. However, employee level intelligence is also free of corporate speak and accounting games.
Alas, consumer trends and consumption do not seem particularily relevant at this juncture. Given, that we have suspended belief in favor of a year long Santa Claus rally.
lizzy...look at cnbc dot com headline....gonna be lots of dollar stores opening on madison ave soon!
hahahaha
well there is a lack of "made in china" merchandise on that street.
S&P cloased red. thats means someone isnt getting thier bonus.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
California Industrial Properties For Sale – 436 Results Found
To really understand the the supply (and lack of demand) problem with the REIT's, just visit an online CRE database.
This novice found 400+ (let's see 22 pages worth) of industrial properties in excess of 100Ksf available in California this evening. The key words are industrial and California...Lately, these parameters were a safe bet for investors.
http://www.loopnet.com/xNet/MainSite/Listing/Search/SearchResults.aspx?l...
No buyer financing, no tenants, increasing vacancy rates, higher cap rates...Can you say meltdown?