Friday, October 9, 2009

The return of the commercial mortgage backed security?

The moribund market for CMBS may be coming back to life, according to a Bloomberg story on Friday. The headline on the piece is “Goldman Sachs seeks to restart commercial-backed bond sales.” Really, it should have been “Goldman, real-estate developers hope Fed will take a punt on shopping centers, help refinance debt”.

From Bloomberg:
Goldman Sachs Group Inc., seeking to take advantage of an untapped Federal Reserve program, may sell the first commercial-mortgage bond since June 2008, backed by a $400 million loan to an Ohio property owner.

The five-year loan to Developers Diversified Realty Corp. made by a unit of the New York-based bank is secured by 28 shopping centers. It will be used to repay debt on those properties and others, and to reduce the outstanding amounts of credit facilities, Developers Diversified said yesterday in a statement.

Developers Diversified and Goldman Sachs are working with the Fed to qualify the loan for the government’s program to unfreeze the $700 billion market for securities backed by commercial mortgages. The Fed expanded its Term Asset-Backed Securities Loan Facility to newly issued commercial real estate debt in June. No sales have been completed since then.

The caveat here is that the revival depends entirely on the support of the US government, and as such is not really indicative of the health of the patient market. This is true also for the market in the underlying assets of those bonds, as Deal Journal pointed out on Wednesday in a note on the Corus Bank asset sale:

In all, eight investors lined up to buy the Corus’s portfolio of mostly construction loans, which is arguably one of the most devalued assets in the U.S. right now. The winning bid from the investor group, which includes private equity firm TPG, Starwood Capital Group and the Federal Deposit Insurance Corp., values $4.5 billion of Corus assets at 60 cents on the dollar. That is nearly double what experts predicted.

Does this mean that the $2.7 billion price that the investors paid for Corus’s assets is a good benchmark for valuing similar commerical real estate?

“No,” says Linus Wilson, a finance professor at the University of Louisiana, who has studied similar FDIC-brokered deals. “Private investors without government subsidized leverage would not be able to pay that price if they have to raise their own capital from private sources.”

One not-even-done deal does not a recovery make.

The situation is much the same across all “private label” asset-backed securities. At a hearing on Wednesday, George Miller, executive director of the American Securitization Forum, told a subcomittee of the Senate Banking, Housing and Urban Affairs Comittee that ABS are being issued at about one-fifth the rate of 2006, the year when it all went pear-shaped.

According to Miller’s testimony:

In the asset-backed securities market, total issuance volume remains at a relatively low level, with 2009 issuance projected to reach $130 billion, roughly in line with the $140 billion issued in 2008 but sharply down from the $750 billion issued in 2006.

The state of the private-label RMBS market is dire (emphasis FT Alphaville’s):
For residential mortgage-backed securities, 2009 to date has seen over $1.2 trillion in issuance, compared with a yearlong total of $1.3 trillion in 2008 and $2.1 trillion in 2006. However, in 2009, less than 1% of this has been issued without a government or GSE guarantee (i.e., private-label MBS); this is compared with private-label MBS comprising over 23% of all issuance during the time period from 1996 to 2006. Furthermore, private-label MBS transactions that have occurred in 2009 involved pools of seasoned, conforming loans - no major private-label residential mortgage-backed securities deal of which we are aware has directly financed new mortgage loan origination this year

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