Bond Insurer Rumors Rule: Macklowe Cedes Control To Lender
A: Yea, 125 basis points of fed rate cuts also helps but in my view its the roller coaster rumors surrounding the bond insurers that are moving markets. Yesterday, S & P downgraded Fitch and rumors swirled that Ambac and/or MBIA may be next! Today, MBIA had a call and re-assured investors that they have sufficient capital to maintain their 'AAA' credit rating ---> markets quickly rallied as this news spread. While psychology & investor confidence experience their violent ups & downs, front lines still remain shaky. So what happens when you can't pay your debts? You cede control of your holdings to the real owner; the lender. That's exactly what Macklowe just did.
The feds super aggressive fed rate cuts have a two pronged effect:
a) initial jolt of confidence for tradable markets
b) an 8-12 month job, stimulate the economy, encourage investments/risk
It has rained stimulus over the past 2 weeks. In another week or so, the initial jolt of confidence (which seemed to last only an hour yesterday) of the rate cut will wear out. Then we have to wait another 8-12 months to see the actual effect of the 50 basis point ease. In a few more months, we'll probably start to see the effects of the first rate cuts of this latest easing campaign.
But in my opinion, its the fate of the bond insurers that are sparking these rallies and selloffs. Talk about volatility, how important is it that the biggest insurers maintain their 'AAA' ratings! The markets, especially the financials, think its very important. I see one of two things occuring in the next two weeks:
1) some sort of bailout plan announced on a company by company basis in some way, shape or form by either gov't or private sector
2) ratings downgrades
Its a race. Which will win out first? After today's MBIA call, the markets and financials are betting on choice # 1!
According to this Forbes article: "On the call, MBIA Chief Financial Officer C. Edward Chaplin said that rumors that company is nearing insolvency "are without merit." He also said the company has enough cash on its balance sheet to cover its needs for two years. He said insurance company dividends and a credit facility combined offer another four years of coverage."OK, I hear you. I also heard Countrywide tell me two months ago that they would be profitable this quarter, they weren't! Instead, they posted a $420+ million loss! But, the MBIA CFO says so! What about Ambac? Radian? PMI? MGIC?
Meanwhile, in the real world but not really news, Macklowe can't pay his debts. This story popped up a while ago and the world knew there were potential problems. So, he'll pass over his $7 Bil worth of office properties to the lender.
Calculated Risk is on the wsj.com story:
Troubled New York real estate titan Harry Macklowe has reached a tentative agreement with his lender to turn over effective control of seven Manhattan office buildings he triumphantly acquired less than a year ago for $7.2 billion. Mr. Macklowe borrowed $5.8 billion from Deutsche Bank to acquire the buildings in a highly leveraged transaction during the height of the real estate frenzy early last year. The debt is scheduled to come due on Feb. 9.While not necessarily walking away, it is a sign of the times. Remaining solvent (able to pay off your debts) is a question mark for 2008 outside of Manhattan's little shell. How will this impact the CMBS markets that we discuss here often?
According to FT.com's article "Macklowe’s potential to default could weigh on CMBS deal":
Developer Harry Macklowe’s financial woes could negatively impact COMM 2007-FL14, a USD 2.5bn commercial real estate deal, a buyside source and a source familiar with the transaction told Debtwire. If Macklowe fails to pay, the loan will go to the special servicer who would declare a default and start the loss mitigation process. It is unlikely, however, that the default would lead to an actual foreclosure, because Macklowe’s properties “are so sought after,” the source familiar with the transaction said.Ahh Manhattan real estate's primo location saves this situation! A nice sign in an otherwise cautious story.
PS: I'm very busy! Doug Heddings is dead on that its active out there. I still see some drop in confidence, but there seems to be plenty of buyers out there looking at our tight inventory. Herd like mentality tends to make those without any pressure a bit more interested if the property meets their needs and is priced right! More listings are coming on as expected, so lets see how sales volume does and whether sellers are willing to price right and sell fast OR price higher but negotiate to get a deal done with a serious buyer.
PHOTO: nypost.com "FLIP FLOPPED: Macklowe Seeks $1B Infusion"
Comments (10)
Since Macklowe is a very well known name in the RE industry, do u think this will have any LARGE mental impact on the residential market... it will at least make people pause and think about the "invincible, its different here" mantra
Posted by uwsider | January 31, 2008 6:47 PM
Isn't MAclowe a commercial developer? How will that sour sentiment for people looking to buy a home? Maybe you could give the gloom and doom a rest and talk about something else such as low inventory or resliency iin the face of a national decline.
I get your point, Noah...credit market turbulence, tighter lending standards, slow national real estate market. Much of this becan in late 06, yet Manhattan has defied the national trend. Why not an article as to why that occurred.
Posted by mh23 | January 31, 2008 8:52 PM
Macklowe is a commercial deveoper yes, but he is also VERY seasoned, experienced and smart ... yet he also got caught up in the hype..
If someone as smart as Macklowe got caught with his pants down, you don't think it will make people stop and think about the market in general?
Posted by uwsider | January 31, 2008 9:50 PM
mh23 - I discussed why Manhattan has remained so strong so many times. Go back and read my earlier peices, but in case you dont feel like it, Ill confirm what I have even recently stated about Manhattan:
1. Tight inventory - down 21% from DEC 06 to DEC 07
2. Plenty of buyers - yet confidence is down a bit
3. Rental vacancy - rising, I believe over 1% now, but still very low.
4. Rental Rates - still high, yet topped out and reports of rents starting fall a bit
5. Foreigners - I never denied their part in keeping inventory low and fueling our market. I only said confidence trumps currency trade and that you cant deny an effect on confidence
6. Trend to live closer to work
7. Great place to live, crime way down, city was cleaned up and is very desireable.
You just fail to acknowledge when I discuss why Manhattan has held on. I also always stated that we lag in recessions, and lead in recoveries.
This is news. I know you dont like it, but that doesnt mean it shouldnt be discussed. By the way, its very active out there. I admit this. Why dont you at the very least acknowledge that I tell you what I see without BS. What are you so scared of anyway? You really think me discussing what is really going on is going to bring down the market. Please say it aint so! By the way, I have 14 buyers right now, why would they want to work with me to buy in this city if I am so doom & gloom! Enough with the exaggerations!
Posted by Noah | January 31, 2008 10:07 PM
I like the list of positives. Maybe I am just missing the point of the blog. I guess what I am seeing is the following:
1) Uncertainty in the market due to bad debt, and trouble in identifying and assessing all of the debt that is out there. (That will work itself over time. Will it have a drag on Manhattan Real Estate, I doubt it).
2) A weaker consumer due to the fact that they can't pull any more equity out of their depreciating house in suburban Tuscon. (Could lead to a recession, drive down stocks. Will it impact Manhattan? I doubt it, unless Wall Street is totally decimated, which will not be the case).
3) Risk of Inflation. (Very bad, however Manhattan and its wealthy buyers will be able to absorb that more than other parts of the country, if it happens...I'm not sure it will).
On the positive side for Manhattan Real Estate we have:
Your aformentioned observations, and low mortgage rates. I just don't see demand for Manhattan Real Estate diminishing right now. Quite frankly, the biggest threat to Manhattan real estate values is who the next mayor will be. We have enjoyed 4 terms of exceptional leadership in the mayor's office. I think this is an often overlooked point. All we need is another Koch or Dinkins, and things will get worse fast.
By the way, I appreciate your daily inventory number.
Posted by mh23 | February 1, 2008 8:03 AM
mh23 - a very valid point. All 3 points you mention are biggest red flags I discuss here often, and effect on Manhattan is yet to be seen. Will Ben inflate us out of this mess, probably. Is the bad news baked in, people think so but I dont.
Posted by Noah | February 1, 2008 8:06 AM
I can see it already: MSFT buys YHOO, housing issues goes away. Bond insurers are now fine. Jobs market fixed. BUY BUY BUY
Posted by Noah | February 1, 2008 8:58 AM
Macklowe bought buildings that he didn't have cash to buy with loans that he shouldn't have received. It sounds like subprime, except there is a fundamental cashflow holding up these prime Manhattan buildings. The properties, if they're traded will get out of the debt and there isn't much to worry about. If they don't get out of the debt, Fortress will own 7 trophy office buildings, which they can't be too upset about. These are cashflowing assets that have high demand for tenancy.
Last key - there is no bond holder to get hurt here. The loans were bridge loans that were held, not sold. Commercial and Residential real estate are hugely different animals because commercial is backed by a real cashflow allowing you to come up with a realistic value, while residential value is backed only by how many people want to buy the house. Demand drives both, but sponsors don't typically need to do anything except keep the property leased in order to pay their mortgage.
Posted by mike | February 1, 2008 12:28 PM
agree MIke! These are just prime properties and a situation that is very unique. Shows strength of Manhattan in general.
Its outside our walls that all these problems are so different!
Posted by Noah | February 1, 2008 12:44 PM
Well, there's no bond holder, but isn't the loss just that one more layer closer to home? If someone allows a commercial lender close to 100%financing (and I've heard of deals at 125%, talk about leverage), the bank is still holding an extremely highly-priced property with no equity if the borrower walks away. This has been what I've been worrying about for months.
It seems to me to be less of a fear of bankruptcy upon the masses, but that there may be (Trump led the way) a future in business bankruptcies, for companies like homebuilders that are not part of huge conglomerations. What do they care? Over the last few years the execs made enough to retire, why wouldn't they let the company go under?
Posted by brenda | February 4, 2008 9:47 PM