01/09/2009

Pros See No Hope for CMBS Revival in '09...

Shell-shocked securitization pros are already writing off 2009 as pretty much a lost cause.

The financial crisis has left the securitization market so devastated that participants think it's unlikely commercial MBS shops will resume lending this year. Indeed, as the downturn gained momentum in the second half of last year, when no CMBS deals were floated in the U.S., questions began to emerge about whether securitization would be revived at all.

"The infrastructure of our industry has been destroyed," said Boyd Fellows, a longtime CMBS executive. "It's been a slow-motion train wreck, and I think that's going to continue for another two or three years."

While there are differing opinions about when - or even whether - a rebound will occur, there's universal agreement that the CMBS machine that drove lending to frenzied levels from 2005 to 2007 is now broken and won't be fixed in the short term. CMBS spreads have blown out to astronomical levels, making originations uneconomical. The credibility of rating agencies and securitization shops has been severely undermined. Sweeping consolidation and cutbacks have gutted lending operations. And the economy is facing the prospect of a deep recession.

Few expect that list of problems to be addressed in a meaningful way this year. Some CMBS pros think the best they can hope for is to start laying the groundwork to make money in 2010.

One wild card is whether the federal government will step in to prop up the commercial real estate sector, either by buying CMBS directly or by financing bondbuyers. Such a move could help stabilize CMBS prices.

"I think the feds have to do something," said one portfolio manager. "So far they have systematically gone from one industry to the next, from financial services to banks to autos, and pumped in liquidity. It's just a matter of time before they get around to us."

But while government intervention might help bondholders, it would likely have little impact on lending in the near term. "I can't see it bringing spreads in enough for us to start lending again," said one CMBS lender. "For the numbers to make sense, spreads would have to come in from 900 bp to 100 bp. You have to use your common sense. Even if the Fed starts buying, it's not going to move the numbers enough."

That sets the stage for an extended credit crunch that will likely bring down many property owners. "I think we are looking at something that will surpass the real estate downturn of 1989 to 1992," said Rick Jones, a real estate and structured-finance attorney at Dechert. "The world as we know it was bought at a 6 cap, but now it is going to trade at a 9 cap. We are about to see a massive transfer of property from current owners to new owners at much lower prices."

In a normal market, the supply of loans would adjust to meet refinancing demand. But the current market is so dislocated that many borrowers will have a hard time finding loans. For example, Fellows thinks the demand for loans will exceed supply by more than fivefold over the next few years. "There is going to be a gigantic supply/demand disequilibrium," he said. "Just because there is a need for capital doesn't mean there is going to be any capital."

Some veteran CMBS players, including Fellows, have set up operations that are angling to take advantage of the dearth of lending. Fellows, who formerly held senior posts in the CMBS groups of Nomura and Countrywide, has teamed up with three longtime associates to form an investment firm, called Coastal Capital, that will initially buy CMBS loans and bonds and later will originate loans directly. Similar ventures have been formed by Mark Finerman, former CMBS head at RBS Greenwich, and Brian Harris, former CMBS head at UBS.

"As the train wreck unfolds, I think you'll see four or five groups like ours," said Fellows. "First, we will spend the next few years buying things in chaos, then our same teams of people will evolve into lending operations."

U.S. commercial MBS issuance plunged by 95% last year, to $12.1 billion from $230.2 billion in 2007. That was the lowest total since 1991. No deals were floated from July through December - marking the first time since 1986 that there were two consecutive quarters without issuance.

Thirteen CMBS pros surveyed by Commercial Mortgage Alert foresee meager U.S. volume again this year. The average prediction was for $11 billion of issuance, with individual estimates ranging from zero to $25 billion.

Back Print