Thursday, May 21, 2009

"Chasing Returns Regardless Of Valuation" And The Kneecapping Of CMBS Lockboxes

Some very fitting words from Mike Cembalest of JPM, putting the Green Shoots theory, and the irrational exuberance of the past 2 months, in perspective (highlights added).
People are now just beginning to grasp that monetary and fiscal expansion that is 10x what was done during the 1970s should give them pause to reflect about unintended consequences. The way investment advisory firms have been latching onto "Green Shoots" is astounding. Its not that Green Shoots evidence is non-existent. It's how they are ascribing almost a 0% chance to a negative reversal in activity or sentiment (e.g., April retail sales or Chinese exports), and have ruled out entirely that the bounce may just be a replenishment of a depleted supply chain, and not much more. Maybe they are simply tired of a bear market after 2 years, and just want it to go away. I am beginning to see counterfactual evidence (e.g., rising credit card losses, weakness in Chinese retail demand once you strip out government owned enterprises) selectively ignored by Green Shoots advocates (just like the old Pravda newspaper). And I read this today from an independent research shop: "Investors might have to chase returns over the next several months to stay ahead of their benchmark – a potentially bullish scenario for stocks, regardless of what the valuation picture looks like". Regardless of the valuation picture; gee, that was a great strategy for the LBO industry at 11x EBITDA.
More importantly, Mike provides some much needed color on the latest developments in the GGP bankruptcy.
As for the legal industry, they're on the soapbox as well. The following commentary was sent out by Cadwalader on GGP:
"Impact of the Final Orders. The final cash management and cash collateral arrangements in effect turn the Project-Level Subsidiaries into debtor-in-possession lenders secured by administrative claims and first liens on the Main Operating Account. In comparison with the CMBS lenders’ prepetition collateral, the post-petition position of the CMBS lenders ironically represents an improvement in situations where the excess prepetition cash flow was not being trapped.

The final cash collateral order characterizes the upstreaming of cash as loans rather than a capital distributions and gives the CMBS lenders a replacement lien on the administrative claims arising from the intercompany loans."
My personal interpretation: for clients who had no lockbox protections in the first place, they are now better off. Yes, a newspaper over your head is better in the rain than nothing. But the legal industry just spent the last 20 years creating an intricate web of procedures and waterfall arrangements that were supposed to protect secured lenders. Many of the GGP secured lenders WERE supposed to have cash flows trapped at the SPE in case of bankruptcy, either by the parent or at the sub. And here, at the first stress test of thousands of billable hours or work, a judge throws the lockbox protections out, declaring that advances to GGP being loans and not capital distributions is "adequate protection". The final orders could equally be interpreted as a repudiation of part of the underpinning of the entire structured finance business, but I would not expect to read that from any of the white shoe firms.
In other words, the entire CMBS legal framework is now undone and each bankruptcy will have to be resolved on a case by case basis, with case law interpretation provided by assorted Judges, some of who may not agree with Ropper's generosity. Sphere: Related Content
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