Credit Downgrades / Blackstone / Commercial

Posted by urbandigs

Tue Nov 13th, 2007 10:00 AM

A: Lets enjoy what looks like will be a nice Walmart induced bounce today, even as credit concerns continue under the surface. Yesterday, Fitch downgraded some $37 Billion worth of structured finance CDO's, Blackstone President warns of a mortgage black hole, and a spillover into the bonds backed by US commercial mortgages which shrank some 84% in the past 8 months. On to the

Just the facts people as we try to assess the continuing damage bubbling under the surface before it reaches the good people of creditville; a not so nice place to live. A few things are worthy of discussion on a day that will seem like a nice relief rally from the credit selloff.


As the rating agencies scramble to fix the mistakes they made by dropping the ball on what used to be 'AAA' rated securities, more downgrades were announced.

According to Forbes:

Derivative Fitch said it has downgraded 37.2 bln usd of structured finance collateralized debt obligations (SF CDOs) across 84 tranches.

Ratings on 66 US cash and hybrid SF CDOs remain on negative watch pending resolution on or before Nov 21, 2007. It said the actions are based on the continued credit deterioration of the underlying collateral, as well as changes to the default forecasting assumptions.
Nothing new here folks. In my post about "Ratings Farce Hurts credit Markets" I discussed how:
What once was thought to be AAA rated securities, actually are NOT! As rating agencies adjust their criteria for rating these assets, and downgrade the ratings, the investment opportunities shrinks as many hedge funds and other institutions have restrictions on purchases of junk rated holdings.
Quite simply, its much harder to RAISE CAPITAL if your assets are getting downgraded to JUNK status; which is currently happening.


Ugh. It was logical to think it's just a matter of time until the credit problems start to infect the securitization of commerical mortgages. Well, that time has come.

According to's article "Hysterical US Bond Investors Threaten Commercial Property":
Global credit turmoil has spilled over into the market for bonds backed by US commercial mortgages, threatening to push down property prices and scuttle deals.

Issuance of US commercial-mortgage-backed securities fell to $6.3bn in October, down 84 per cent from a record $38.5bn in March, according to Commercial Mortgage Alert, a trade publication. The decline in CMBS issuance is crucial because such securities have provided an estimated 40 to 60 per cent of financing for new commercial property purchases in recent years.

Moody's index of commercial real estate prices is expected to show that prices flattened or fell in September, after rising nearly 14 per cent in the 12 months to August. RBS Greenwich Capital predicts that US commercial property prices will fall 10-15 per cent next year. Market turbulence is also raising the cost of commercial mortgage borrowing.
What I worry about in this commercial sector, is that many banks have loosened their terms in order to get more business in the past 12 months or so. The story mentioned this too.
In the past six to 12 months, banks have scrambled to attract borrowers by agreeing to looser terms - making loans that exceed the value of properties and accepting more interest-only repayments. Loans rose to 118 per cent of the value of commercial properties in the last quarter, Moody's says.
Ramifications of those looser terms is my main fear in this sector.


Ok, so their CEO got questioned on his exit strategy and the stock has floundered since going public. But the Blackstone Group still has some very smart people, and when the President publicly states something like this, it's worth listening to.

According to
The US mortgage crisis is "deeper" and "scarier" than anyone expected, Tony James, president of Blackstone, said on Monday. Mr James, also Blackstone’s chief operating officer, said that deal flow was rebounding but the market for private equity buy-outs would be constrained by the reluctance of big banks to lend during the mortgage crisis.

"The mortgage black hole is, I think, worse than anyone saw. Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense . . . is they don’t have a clear picture of how this will play out and confidence is low."

However, he said that subprime mortgage prices were reaching a point where they offered "real value". Blackstone is more interested in buying mortgages themselves than home lenders, he said.
Scary, but perhaps a silver lining? That note referencing the fact that subprime mortgage prices (the bonds) are reaching a point of 'real value' could hint that the Blackstone Group is beginning to nibble on some distressed assets? The one big thing I'm waiting for is liquidity to come back into the secondary mortgage markets to signal that value is being picked on by longer term investors. So far, it hasn't happened but this is an interesting thing to hear.

Also, we need to keep an eye on any forced liquidation of assets that may need to occur in the near future due to ratings changes, unwinding of Yen carry trade, or credit market deterioration. Keep an eye on commodity prices for any signal of major liquidations to meet debt requirements.