CMBS Market and Trends: Ranieri: US securitisation industry at ‘crossroads’
***The US CMBS industry is at a “crossroads” amid regulatory efforts to tighten rules regarding new securitisation deals, according to Lewis Ranieri, founder of Ranieri Real Estate Partners and the father of the mortgage-backed securities market.
Under the Dodd-Frank financial reform act, passed in July, ratings agencies became liable – for the first time – for the ratings attached to CMBS. It was a move that prompted the nation’s three dominant agencies, Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, to ban the use of their ratings in documentation for new bond sales: an action that, in turn, saw the Securities and Exchange Commission promise to take no action against offenders until at least January 2011.
However, speaking at the annual Association of Foreign Investors in Real Estate conference in Chicago and quoted in the November issue of PERE magazine, Ranieri questioned: what happens after January 2011?
Ratings were crucial to the proper functioning of the CMBS market, and CMBS was crucial to the proper functioning of US real estate capital markets, he explained.
“We can’t turn back the clock to when most assets, including real estate, were funded on balance sheet.” The “diminution in value” that would occur from just balance sheet lending would not, he predicted, “be a very comfortable thing to contemplate”. As a result, securitisation was “at a crossroads”.
New CMBS issuance reached a peak of $250 billion in 2007, with senior real estate executives telling the Urban Land Institute and PricewaterhouseCoopers Emerging Trends 2011 report new issuance could to climb to between $75 billion and $100 billion “within a few years”.
Retail assets dominate the new deals that have come to market to date, with a recent JPMorgan pool of 30 loans comprising 67 percent retail compared to 16.5 percent office, 10.3 percent industrial, 5.3 percent for mixed-used assets and 0.8 percent in self storage. H2 Capital Partners acquired the pool’s B piece, while the debt service coverage ratio and loan-to-value was 1.66 percent and 60 percent, respectively.
It is the spreads above Treasuries and swaps, though, that is giving the CMBS market a competitive edge, sources told PERE. Pricing for the JPMorgan deal saw spreads of around 150 basis points for AAA tranches. Historically, those spreads would have been nearer 30bp.
“There is a lot of room for improvement on spreads,” one executive explained. ***
Current headlines include:
- DDR CMBS sale attracts strong investor demand
• DDR to use CMBS sale to pay down debt
• Just 18% of US CMBS loans paid off at maturity
• CMBS industry to grow to half of peak
• Apollo Global raises $107m for CMBS fund
• $39bn of CMBS loans can’t cover debt with cash flow
• CMBS workout complexity could slash 20% IRRs to 8%
• CMBS restructurings add $12bn to US distressed real estate pile
• CMBS ‘the future’ of real estate business
• Cerberus-backed LNR pursues $400m restructuring plan
• ASIA NEWS ANALYSIS: Securing distress
• Fortress buys special servicer CW Financial
• US should continue explicit guarantee of mortgage market
• AMERICAS NEWS: Weight lifting - FDIC structured sales
• Bank balance sheet loans next big issue for US real estate
• AMERICAS NEWS: Resuscitating securitisation
Using this post as reference for now. Will come back to discuss.
My bet is that it will come back. Maybe not to '07 levels, of course, but that it will come back and it will not take 10 years to do that. This is not even based on what I've read or seen in the market; it's based on my trust in what people have said who are much savvier and more experienced than I. In fact, in my city the local CMBS office for a large BB investment bank has finally started talking to brokers again.
This may seem paradoxical when there is still so much bad CMBS that has yet to be taken care of in one way or another, but what I've been told is that the slight comeback that we're seeing has nothing to do with those crappy deals and the new wave only applies to stable, quality real estate.
Besides, CMBS is still a relatively new product, and only now did it finally get around to experiencing its first blow-up. Doesn't every "hot" new product on the Street endure this phenomenon first before people get used to it?
I may not be in college anymore, but I am still younger and less experienced than mr1234 and many others here, so I write this with as open a mind as possible. I'd love to hear my points challenged.
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