Investment-grade commercial real estate prices gained 4.4% in the third quarter of this year. But, it's hard to tell if -- like brief blips of hope we've seen in consumer spending, unemployment and even luxury meals in London -- this is a change in the market or just a tease.

This increase in the MIT Center for Real Estate's transaction-based index (TBI) is the first up-tick in more than a year and the biggest gain since the middle of 2007. One quarter doesn't make a trend, cautions David Geltner, director of research at the MIT Center for Real Estate, but he says, "this is the strongest sign of a bottom that we've had in two years." The TBI reached 36.5% below its 2007 peak last quarter, up from 39% from the high-water mark in mid-2007.

Continue reading Commercial real estate comeback

Commercial real estate comeback originally appeared on BloggingStocks on Tue, 03 Nov 2009 15:40:00 EST. Please see our terms for use of feeds.

Continue reading Chasing Value: Newcastle up 500% -- why?

Chasing Value: Newcastle up 500% -- why? originally appeared on BloggingStocks on Tue, 22 Sep 2009 16:45:00 EST. Please see our terms for use of feeds.

The U.S. Treasury and the Federal Reserve extended the TALF program to March 31 for ABS and legacy CMBS deals and June 30 for new CMBS deals. The total for these programs is $200 billion.

Spokespersons for the Treasury and the Fed said: "Conditions in financial markets have improved considerably in recent months. ... Nonetheless, the markets for asset-backed securities (ABS) backed by consumer and business loans and and commercial mortgage-backed securities (CMBS) are still impaired and seem likely to remain so for some time."

Term Asset-Backed Securities Loan Facility (TALF) has been successful for the consumer ABS market, with $62 billion in deals done this year and a dramatic drop in funding costs. The benchmark used is a one-year bond backed by prime credit. The spread over Libor has fallen about 150 basis points to 60 bps over Libor.

No new CMBS deals have been struck in the first half of the year. The main reason for this is that CMBS deals are more complex and require more time to put together.

So as far as the financial markets are concerned, the Fed is saying that we are not out of the woods yet and the market will remain "impaired" into next year.

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U.S. Treasury and the Fed extend TALF originally appeared on BloggingStocks on Tue, 18 Aug 2009 14:40:00 EST. Please see our terms for use of feeds.

• Despite the deleveraging process many companies have undertaken, on an EBITDA/Debt ratio junk rated companies are as leveraged as they have ever been thanks to the "complete trashing" of cash flows. MS expects leverage ratios to rise even further and, therefore, from a "leverage-risk to yield" basis, junk spreads are way too tight to reward buyers for the underlying default risk.
• In the residential Option ARMs market, delinquency rates as a percentage of original balances are running higher than they were in subprime. On the other side of the ledger - and confirming what is intuitively logical - recoveries as a percentage of balances are significantly lower and falling, which will continue to put heavy pressure on home values. In the Alt-A market things are not going that well either.
• In the Commercial Mortgage Backed Securities (CMBS) world, Standard & Poor recently implemented new tests to determine the downgrade of various CMBS vintages. The test for the 2004 issues was relaxed, which is likely to spare from downgrade 65% of AAA rated CMBS which had been put on negative watch. Under the prior, stricter test, 80% of the watch list issues were in danger of downgrades. Are we really to believe that the relaxation of the testing standards for issues that are coming up for refi between now and the next two years are just a coincidence?
• What caritas the S & P showed toward the 2004 CMBS it apparently took it out on the mezzanine CMBS of 2006 and later. Most AAA mezz tranches are or will be downgraded to A/BBB- grades, while all junior AAAs tranches have gone straight to junk.

Corporate bond market rally originally appeared on BloggingStocks on Mon, 13 Jul 2009 14:40:00 EST. Please see our terms for use of feeds.

Continue reading Doomsday Scenario: Just the numbers, ma'am

Doomsday Scenario: Just the numbers, ma'am originally appeared on BloggingStocks on Wed, 04 Mar 2009 07:00:00 EST. Please see our terms for use of feeds.

Continue reading General Growth Properties: Too bad to fail and possible happy ending?

General Growth Properties: Too bad to fail and possible happy ending? originally appeared on BloggingStocks on Mon, 23 Feb 2009 09:00:00 EST. Please see our terms for use of feeds.

Fortune -- which shares parent Time Warner (NYSE: TWX) with BloggingStocks -- provides a clue about how big of a write-down Lehman Brothers Holdings (NYSE: LEH) needs to take in order to account accurately for its Collateralized Debt Obligation (CDO) portfolio. By my estimate, that write-down could total roughly $4 billion -- wiping out 20% of Lehman's $20 billion in capital.

How so? I calculated $4.07 billion worth of write-downs -- $1.63 billion of the write-off is from worthless BB and below rated CDOs and another $2.44 billion is from the remaining CDOs that are worth about half their stated value. This is based on Fortune's report that Lehman has $6.5 billion worth of CDOs. The 25% that are rated BB or below it believes are worthless. The remaining 75% it figures are worth 50 cents on the dollar.

But wait, there's more. Lehman has $39 billion worth of Commercial Mortgage Backed Securities (CMBSs) which have lost value. A key index has declined in the last quarter -- but I don't know how much. Assuming the decline was 25%, Lehman would need to write down an additional $9.8 billion. If Lehman needed to take the $9.8 billion write-down plus the $4 billion for the CDOs, its capital would decline 75%.

When I think about how Lehman is not the only one to hold these dodgy securities, it becomes clear that our financial system is resting on a very shaky foundation.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

When will Lehman take $4 billion in CDO write-downs? originally appeared on BloggingStocks on Thu, 05 Jun 2008 09:48:00 EST. Please see our terms for use of feeds.

Fed Chair Ben Bernanke may be regretting the speeches he gave which tried to comfort investors with the idea that problems in the subprime mortgage market were contained. Yesterday, I posted about how banks, already nervous about subprime loans, are stiffening terms for other borrowers -- like those in private equity.

Today, the Wall Street Journal [subscription required] reports that bad loans are growing in a new category -- commercial mortgage-backed securities (CMBSs). CMBSs are packages of mortgages made to companies which buy real estate for operating their businesses -- such as retail stores in malls. CMBS delinquencies rose 13% in the second quarter to $1.65 billion from $1.46 billion in the first quarter, according to Standard & Poor's, which attributes the rise to overaggressive loans -- e.g., interest-only loans, which allow borrowers to forgo paying down loan balances -- made in 2006, as well as increased problems in the retail sector.

This is the first I've heard of the problem. And it suggests that there is even more trouble ahead -- commercial borrowers took out more loans than than their properties were worth in the second quarter of 2007 -- 117% more than their properties' values to be precise. What is probably going on here is that bankers generate such high fees making the mortgages and selling them that they loosen their credit standards so they can add even more new loans to their portfolios. The problem comes when the unsuitable borrowers can't repay.

Maybe Bernanke is trying to project confidence when he makes these statements. But when reality is at odds with what he says, that confidence evaporates.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Bernanke's subprime non "containment" extends to commercial mortgages originally appeared on BloggingStocks on Sat, 28 Jul 2007 08:44:00 EST. Please see our terms for use of feeds.