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Shopping Centers Today -> April 2003
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SINGLE-ASSET SECURITIZATION FADES AWAY
In a post-Sept. 11 world, single-asset commercial-mortgage-backed securitization, or CMBS, seems to be quickly becoming a thing of the past.
CMBS deals, such as the one that financed the 1.5 million-square-foot Freehold (N.J.) Raceway Mall, used to be the favorite way for landlords to finance commercial properties, especially trophy regional malls and office buildings. Not anymore.
“Ever since [Sept. 11], people are hesitant to do single-asset CMBS deals,” said Arthur Milston, senior vice president of research at Granite Partners, a New York City-based real estate investment bank. “If something happens, there goes all of your security in that one deal.”
The Freehold Raceway Mall securitization (for Rochester, N.Y.-based Wilmorite), which was managed by Morgan Stanley, was completed right after the terrorist attacks, said a Morgan Stanley official. Since then, the market has preferred to mix very large deals in with more diverse groups of real estate loans to minimize the risk of a default.
CMBS deals are securities backed by the cash flow from real estate assets. In 2000 and 2001, before the terrorist attacks forced the market to deal with insurance issues, there were still plenty of single-asset CMBS deals, notes Jim Duca, a managing director of the CMBS group at Moody’s Investors Service. In 2001 the CMBS market produced about 25 such deals. That dropped to four in 2002, said Milston. At press time not one single-asset securitization had been completed, and that isn’t likely to change for the rest of the year, according to Duca.
Instead, bankers are trying to ensure that large real estate loans represent smaller portions of securitized deals. Sometimes they will split a loan’s proceeds between two deals, Duca said. Morgan Stanley came up with such a plan with its securitization of a $300 million loan on the 2.2 million-square-foot Woodfield Mall, Schaumburg, Ill. In that deal, completed in February 2002, Morgan Stanley sold about $60 million in subordinate bonds to a single buyer and put the rest of the proceeds into three other deals.
What has happened? For one thing, the issue of terrorism insurance is only temporarily resolved, asserts Pat Corcoran, vice president of CMBS research at J.P. Morgan Securities. The government backstop that President Bush signed into law last year expires in December 2005.
“It doesn’t give the same incentive as a permanent measure [would] for the private sector to change its behavior all that much,” he said.
But terrorism coverage was only part of the problem, Corcoran said. Investors and investment bankers alike had to worry about the other issues battering U.S. corporations, including accounting scandals and the economic downturn.
“As we entered the recession period, [office] tenants were going bankrupt, choking and reneging on leases,” said Corcoran.
Rating agencies have always preferred fusion deals, which blend large loans with conduit deals, a pool of diverse smaller loans of lesser credit quality.
However, although banks are making efforts to diversify deals, they could go further, said Duca. Moody’s is increasingly concerned about low levels of diversification in some securitized loan pools. As a result, senior bonds may not be adequately protected from event risk. Typically, CMBS deals are arranged so that the subordinate bonds absorb losses before senior bonds.
If one loan represents 20 percent of a deal and becomes a problem, that could destabilize the ratings on the entire deal, he notes. “We’re seeing some deals which have several large loans together that represent up to 50 percent of the pool,” Duca said. “Some conduit deals are becoming more like large-loan deals.”
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NCREIF
property index: Total 4Q 2001 returns |
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Returns for malls and neighborhood and community centers were robust, as expected, because retail continued to attract strong interest from real estate buyers and investors in the second half of 2002. Fourth-quarter preliminary returns on malls were 5.74 percent, up from an adjusted 3.43 percent for the previous quarter; community and neighborhood centers were 4.06 percent, up from 2.59 percent; and power center returns were 3.41 percent, down from 3.74 percent. Source:
National Council of Real Estate |
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Making the wrong grade
The Morgan Stanley tenant credit risk index uses a credit
risk score, called a Z-score, developed by Edward I. Altman
of the NYU Stern School of Business. A score greater than
3 indicates a healthy company, scores between 3 and 1.8 denote
a gray zone, and companies with scores lower than 1.8 are
considered unhealthy. The companies shown here have the worst
Z-scores. |
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Source:
Morgan Stanley, company data
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