Loan Extensions - Bridge to Nowhere?
"Hope is not an exit strategy"
Stacey Berger CMBS special servicer 2009
Stalling tactics! Everywhere I look I see them. The Fed accepting shakier and shakier assets as loan collateral, mortgage forbearance programs and, increasingly, bank loan extensions. In fact, the whole TARP/TALF/PPIP monstrosity embodies it.
The supposition behind all of this activity is that asset values are, somehow, temporarily depressed, true fundamentals are much better than what markets are giving them credit for and ......if we just give everyone a little time, things will work themselves out. Unfortunately, we continue to see evidence that the markets have things more right than wrong. Are there some securities that are oversold? Certainly. All you need to look at is the big bouncebacks we are seeing across markets to know ceratin parts of the market got oversold, yet the breadth of problems related to excessive use of leverage worldwide continues to surprise.
As a result of the number of old maids being exposed with each new turn of the cards, creditors are not generally receptive to the idea that they should just give debtors a little more time. We saw this sentiment on display big time in the spectacle of General Growth's bankruptcy last week. Tom Nolan, the President and COO of General Growth, the largest property company bankruptcy in history, told MSNBC that the only reason the firm was declaring bankruptcy was due to the inability to roll forward debt that is maturing. According to General Growth, the firm's malls are very well occupied, the firm's cash flows are strong and it is current on its debts, and he noted "We have not had to materially re-write leases and we don't expect to." You can see the video here. Now I'm not close enough to the General Growth story to argue the veracity of the content of the video or comments above, and lord knows we have seen people in high places put a lot of lipstick on porcine situations as of late, but away from that debate, the bottom line is that the market participants that have a choice are not in a forbearing or rescuing mood.
In contrast, there is a large group of market participants who don't really have a choice. Those are the banks and other highly levered entities that are already sitting on piles of loans that could potentially go bad and they just can't afford to let that happen without blowing up their own balance sheets. (Our creditors China, Japan and others included.....fortunately). In many cases they don't want back assets they would have to sell into a bad market. They are not in the business of managing businesses or real estate for the long-term, and they may be best served by extending debt for as long as they can and/or submitting to some form of cram down of their principal in a bankruptcy, if it produces a debt structure that can be supported by the company over time. In this way the bank will at least get a better chunk of its money back than if it foreclosed on the asset and tried to manage it and market it.
Loan extensions to companies that participate in the public markets are highly visible and here is a short list of those that have shown up in the news in recent weeks:Borders, Chipmos, MGM Mirage, Craig Wireless, Park Plaza, Macerich, Hines REIT, OZ Minerals, Sky Europe, Canwest Global Communications, and Centro. But I know from my own business that loans are being extended/restructureed right and left in the commercial real estate world. I even ran across an article about a school district, which is trying to rejigger its debt due to cash flow problems and difficulties servicing it's debt as currently structured. Reasons for banks to extend loans include the inability of developers of new properties to sell them or get a permanent mortgage to pay back a construction loan or the end of an interest-only or interest reserve period where the anticipated repositioning of a property has improved cash flows enough to support the purchase money mortgage.
Now comes some straight talk by William Mack, Chairman of Mack Cali Realty and Chairman of AREA Partners previously (known as Apollo Real Estate Advisors), who told Bloomberg a couple of weeks ago "Landlords who financed purchases with at least 60 percent debt are now dangerously close to zero equity." FYI purchasing with 60 percent debt was seen as conservative in many circles as recently as.....yesterday.
With banks perilously close to having no equity, property owners perilously close to having no equity and a flood of debt coming due and properties likely for sale, it's no wonder that those who do have money to invest are sitting on their wallets. In acknowledgment of some conflicting opinions by wise men, I will mention that Sam Zell told an NYU conference that real estate values are now "below any rational analysis." I will also mention that while there are very few investors as intrepid as hedge fund manager William Ackman, of Pershing Square Management. He has been buying the equity of companies with maturity default risk and even offering debtor in possession financing to the same firms if/when they go chapters, he believes that equity value will be preserved through the bankruptcy process in many cases.
The General Growth bankruptcy does not augur well for the refinancing of $90.5 billion of CMBS debt coming due this year. We will get another datapoint on the market's willingness to forebear with MGM Mirage seeking financing to forestall a potential bankruptcy filing. The complexities of trying to work out a defaulted CMBS loan as well as the daunting schedule of maturities has prompted many to suggest that there will be significant extensions of these loans as opposed to foreclosures. Stacey Berger, executive vice president at Midland Loan Services, a master and special servicing subsidiary of PNC Financial Services Group explained the process and mindset of CMBS servicers in a recent Financial Times article
Should a mortgage become delinquent, the servicer will transfer the loan to a special servicer, Berger said. The special servicer will take any action that yields the highest recovery for the CMBS bond holders, he added.Those actions include a modification, a restructuring, or a liquidation of the asset, Berger said. In less dysfunctional markets, resolutions don’t take too long, but because the current commercial real estate market is so challenging, the resolutions have taken much longer, he said.
Those resolutions could include forbearances on defaults or extensions of the mortgage maturities, Berger said. However, forbearances should not be predicated on the hope that the market turns around and financing becomes available again, he said.
“There is a fairly well-known concept: hope is not an exit strategy,” he warned.
Not to fear though, rumors are rampant that an announcement is coming soon regarding the inclusion of commercial real estate assets in the TALF program. Apparently, the $2 Trillion or so of loans coming due by 2012 and the moribund securitization market has impressed those in Washington that something has to be done. Recently, Jeffrey DeBoer President & CEO of the Real Estate Roundtable was quoted in The Real Deal saying; "“we don't expect the CMBS market to come back in its old ways any time soon. So we said we need a credit facility; in other words -- in effect -- a gigantic credit card that would help finance new loans, new originations,"
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Comments (14)
Nice article
Posted by Tallahassee property management | April 21, 2009 2:43 AM
Looks like PIPP is dead, courtesy of the Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2009/04/20/AR2009042003294.html
Executive compensation caps for all participating companies in the PIPP. Yeah... that'll get them to sign up.
Posted by MeekSheep | April 21, 2009 8:19 AM
Jeff - this was a very good article.
It begs to ask whether the 'stalling' efforts and 'time' variable are a function of the fact that not all the "bad stuff" has yet to surface?
I believe that our current economic distress will not be rectified until 3 things have happened:
1. Transparency has been established. The financial system has to purge all the bad news at once. Allow the open market to absorb these loses so that true price discovery can occur. This will cause some companies to close business units and will open up opportunities in the future for smaller companies to take over niches that the big boys no longer want to touch.
2. Greed at the executive level needs to stop. Banks returning TARP payments in order to avoid paying 90% of the bonuses back to the government is not the correct decision for the company nor the economy.
3. People need to take loses, whether it is the executives taking smaller bonuese, the home owner that needs to downsize, big businesses to close shop, etc. These adjustments need to take place. Some companies have taken risks and gambled on the future, now that they have lost there seems to be a refusal to accept the losses. The denial that these companies are experiencing will hinder the gloabl recovery.
After these 3 things have occurred than we will see lending happen again, small businesses try to start up again, etc. The economy is cyclical, unless we remove all hinderances to the cycle, we will never see a recovery.
We need to pull off the band-aid quickly.
Posted by FlipSide | April 21, 2009 9:15 AM
FlipSide,
I am in agreement with many of your comments. I am amazed that the attitudes of 2006 seem to continue to prevail at big banks and investment houses. No one seems really remorseful for their parts in the financial system coming unglued and they are still totally focused on protecting their piece of the pie....capitalism yes....good citizenship no and most importantly current managements show no ability to learn from their mistakes. Transparency! it could have really forestalled much of this crisis. The markets are in the dark about far too many things including insurance contracts,= (the forebearers of CDS), CDS, loan quality etc. We need a new system where people can access data more easily, making it harder to hide fraud and stupidity behind complexity and opacity. Unfortunately my great fear is that this crisis is too big for the markets, investors and the country to handle all at once, so while the medicine might make us well faster.....it might kill us. I like to think this is why the government is acting the way it is and not just due to cronyism and incompetence. Unfortunately as we have said on many occasions here at Urban Digs....The Deleveraging Will Be Televised.....it will take a long time and it won't be pretty.
Posted by jeff | April 21, 2009 9:33 AM
Can you guys please help me understand why banks paying back TARP money is a bad thing? I understand that it is a self-serving move to protect/position those that are able to pay back to exercise unregulated discretion over compensation practices, but doesn't this benefit the government (and taxpayers) as well?
Posted by OT | April 21, 2009 10:47 AM
I'm not sure that paying back TARP money is a bad thing, especially if you took it because the government told you to or you didn't know there were going to be strings attached (though many refused it because they were smart enough to suspect as much). My problem is we just have no idea who was going to go bust if they didn't get TARp, or if AIG didn't get bailed out, who is going to go bust due to commercial real estate debacle, high yield corporate debt downturn and next wave of mortgage recasts (not resets, but the recast to non-reverse amortizing debt payments). There is no transparency regarding bank solvency. Guys with much more credibility than I suspect that the big banks are largely bust. Public companies have repeatedly lied and obfuscated regarding their condition....(Goldman's lost month of December is a comically small example). The regulators sat by and watched this situation unfold and now we are getting a strategy du jour smorgasbord being rolled out in Washington. No wonder no one wants to step up and invest in debt instruments, how can you without a leap of faith or a huge discount. We need new management across the board and a big dose of the truth. But can we handle the truth?
Posted by jeff | April 21, 2009 11:43 AM
Jeff - agreed with you on all points, but I wonder how simple the "truth" is in this set of circumstances. The truth is complicated by obscure reporting rules, accounting rules, arcance SEC regulations, etc. I know how difficult the truth can be to find in my cog of the machine, and it is not always because someone is trying to cover something up. Despite past misdeeds, I think most companies, including fin services firms, are making an effort to come clean, set aside adequate loan loss provisions, attempt to accurately value arcane securities and their derivative products, etc. Am I being naive??
Posted by OT | April 21, 2009 12:33 PM
that it will be useless without the Bridge Nowhere! Isn’t this show her experience and judgment... she is a liar. didn't her pentecostal teach her not to lie?
Posted by Debt Free @ | April 21, 2009 3:51 PM
Jeff, any thoughts on this article?
The normally cynical FT writers are turning into bulls? I believe that your article on the loan extensions is leading to projected CRE REIT "recovery".
http://www.ftadviser.com/InvestmentAdviser/Investments/AssetClass/Property/News/article/20090420/713c35e0-2a78-11de-8da9-00144f2af8e8/Expect-strong-recovery-for-Reits-say-fund-managers.jsp
Posted by In Debt We Trust | April 21, 2009 8:08 PM
The FT article makes some sense in that it suggests that publicly traded REITs which already refelect much lower valuations on their underlying brick and mortar assets, will likely start to see their share prices recover, before brick and mortar property values turn. Since stocks tend to anticipate the economy this makes sense. In the U.S. those REITs that are not over-levered....and many used much less leverage than individual property owners....should do fine and very well may recover some of their share price losses before the CRE cycle turns. What will happen to REITs that aren't really over-levered, but have a chunk of maturing debt that may not be able to be refinanced is a big question. Unfortunately, in the case of a General Growth properties, they couldn't roll their debt. Bankruptcies like this tend to be a case of the financing environement tail wagging the asset value dog...after all who is going to pay up for properties being sold by a company in bankruptcy. Strange circumstances being driven by the breakdown of the financial system. My fear is stall tactics won't unclog the banks balance sheets, they need to be roto rootered.
Posted by jefff | April 21, 2009 8:25 PM
Thank you.
2 more questions:
1) What about the supposed dilution from REITs issuing (additional) shares instead of cash dividends?
2) Is mezzanine financing dead?
Posted by In Debt We Trust | April 22, 2009 4:25 PM
In Debt,
I'm going to steal my own thunder from an upcoming REIT piece. The dilutive stock issuance by REITs facing maturity defaults is being seen as a positive move because it's better to be diluted than dead. This also squeezes the shorts who are increasingly betting on the death of the REITs as valuations are already discounting lost of pain.
Mezz is not dead. Since Mezz was the high risk position in the debt part of the capital stack, many 2006 era Mezz lenders have gotten then fingers burned....or hands lopped off as deals soar....particularly development deals where equity evaporates quickly if something goes wrong. However, mezz was invented after the S&L crisis because banks would only lend 50 or so LTV and people wanted more leverage. Taking on more leverage when buying a property with a depressed price and high cap rate, is much safer than taking on leverage when prices are high. So it will soon be time to utilize mezz to buy discounted properties or discounted notes from banks....in some cases it will be preferred equity where more of the return comes from the back end. Not sure when mezz players will get aggressive on these strategies, but they have to do something with their money and several have raised new funds. We are in contact with those who are entertaining these strategies. It will be interesting to hear what the industry's thinking is coming out of the IMN mezz conference in L.A. next week. Mezz for new development is mostly dead....but hey new development is mostly dead, in case anyone hasn't noticed.
Posted by jeff | April 23, 2009 7:48 AM
I am seeing a number of relevant real estate articles that nobody has posted/commented on:
Hamptons Real Estate down 23%
http://www.bloomberg.com/apps/news?pid=20601213&sid=adWbwPpIm3nw&refer=home
For Housing Crisis, End Probably Isn't Near:
http://www.nytimes.com/2009/04/22/business/economy/22leonhardt.html
I also saw an article on the Fed possibly taking further action to push mortgage interest rates down to 4%, but I can't find the link.
Some interesting things are going on, that's for sure.
~Thisson
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