Sunday, May 24, 2009

Charting Too Big To Fail

The recent addition of legacy loans to TALF caused CMBX spreads to turn on the nitrous and rip like all the commercial real estate concerns over the past 6 months have disappeared (especially in the top-most AAA tranche). Between financials, whose stocks have doubled on average, and CMBX (whose spreads have halved), there is, at this point, no doubt as to what lengths the administration is willing to go to funnel every single printed dollar into these otherwise doomed industries.

While there is still no indication that TALF v3.0 will work at all (the ongoing tweaks to TALF are nothing more than the government's way to moderate the CRE collapse) and facilitate leveraged interest in AAA CMBX, the market has priced in a massive upside at this point, implying the up/downside from this point, absent a complete nationalization of all commercial real estate, is significantly unattractive.

Aside from the short-covering rally which is all these charts represent, Barclays' CMBS analyst Aaron Bryson does a great job at summarizing the big picture ahead of various CMBX tranches in the coming years:
The implications for CMBS investors are alarming. 82% of loans maturing between now and 2012 have an estimated current debt yield on the A-note below 15%, which appears to be the minimum threshold for lenders in this environment. Recent policy steps, including the extension of TALF leverage to the new issue CMBS market, can mitigate the downturn. For example, if credit conditions turn more favorable and required exit debt yields fall to the 10%+ range, 46% of loans maturing between now and 2012 could face some degree of refinancing pressure – a major improvement. However, significant losses appear unavoidable; we find it highly unlikely that credit conditions will ease to the levels at the peak of the market in early 2007 anytime soon or that NOI will rebound sharply.

In terms of the implications for CMBS investors, we continue to see systemic refinancing pressure, particularly in recent vintages, and are stressing bonds at a wide range of possible loss and extension outcomes. The recent trend for loans that are covering on debt service at balloon maturity but unable to get fixed refinancing is to grant initial extensions, but whether or not these extensions are ultimately successful is highly dependent on the trajectory of the economy. We will explore this in more detail in subsequent weeks, as well as look at maturing loans post-2012. While most attention is focused on extension risk on recent vintage 5y loans and the effect on second pay AAAs, we also see considerable extension risk for recent vintage 10y loans and last cash flow AAA classes.
Truly the pain is only just starting to be felt.






CMBX AAA By Vintage

Lastly, I present the MCDX spread chart, representing the index for risk of municipal default, which consists of both state and city constituents, which has also tightened since March as well as on the heels of Frank's initiative to guarantee municipal debt issues. At this rate, there will i) either be no non-sovereign risk attendant to any and every asset class relatively soon, or ii) the administration's plan of socializing/nationalizing every form of risk imaginable will blow up in some unprecedented and, as of yet, inconceivable manner.

charts courtesy of JP Morgan Sphere: Related Content
Print this post
blog comments powered by Disqus