Real estate survey 2010: Awaiting resurrection – CMBS

The breakdown of the global securitization market has pared down most US and European banks’ ability to recycle their balance sheets in the search for new lending business. From a peak of $324 billion-equivalent of issuance in 2007, global CMBS issuance totalled $8 billion in the first half of 2010, according to data collected by US-based data provider Commercial Mortgage Alert. Meanwhile, with more than $250 billion of US CMBS maturing before 2014, including bonds referencing $90 billion of delinquent and distressed underlying loans, the restructuring crisis is even more perilous for securitized loans. With potentially hundreds of investors in each transaction representing often competing interests, the process of restructuring or unwinding a CMBS structure is particularly complicated. In Europe, the CMBS market is less troubled by delinquent loans and more afflicted by negative equity. Andrew Currie, head of EMEA structured finance surveillance at Fitch Ratings, says that in euro CMBS deals that have matured recently, only one-third of the debt has been repaid and the remaining two-thirds is in varying states of workout or restructuring.

Currie feels that if circumstances stay the same in Europe, there will be a large volume of loan workouts, which if sponsors walk away and properties are left vacant, could deteriorate further in value. The problem is the lack of sales arising from asset pool workouts, especially of secondary properties. “The market could absorb more property being sold than is currently being sold. While there is interest in high-quality assets, there is virtually no demand for assets that have deteriorated over the recession,” he warned.

Bereft of new deals, the US CMBS market has relied on government life support. The Federal Reserve’s extension of its Talf programme to CMBS has supported asset values in primary and secondary markets but the sharp rally in spreads has not reopened the market, with only three deals pricing in 2010. Instead, the industry is looking for a new beginning – CMBS 2.0 – an attempt to reorganize the CMBS market with the benefit of hindsight. Patrick Sargeant, partner with Texas-based law firm Andrews Kurth and former chairman of the Commercial Real Estate Finance Council, says that although this year’s deals have been well received by US investors, there won’t be an easy resolution to the problems the industry faces. “Market conditions have allowed market participants to reflect on what CMBS 2.0 should look like. Lenders have become more conservative in regard to LTV, interest coverage and sponsor quality and there are several investor reforms on the table. But there won’t be a one-size solution to these issues, and progress will take time,” he says.

Although sponsors were very happy to embrace the lower cost of capital and higher leverage offered by CMBS lenders five years ago, Ray Torto, global chief economist at CB Richard Ellis, is not convinced that they are ready for CMBS 2.0. “The securitized market is still on the edge of intensive care and is suffering from distrust of the overall marketplace,” he says.