Commercial Market Solution: CMBS Reboot Can Refinance Debt, Save Banks
Pockets of refinancing for outstanding commercial real estate (CRE) loans may be coming down the pipeline on a case-by-case basis, but the market at-large continues to face many challenges as the rate of debt maturities are set to quicken in the next two years, tenancies rise and valuations drop. The market is such that nearly 3,000 banks, mostly mid-sized institutions, face the severe threat of failure due to over-leveraged positions on outstanding CRE mortgage debt. In the face of this, market players are attempting to give the sector a jump-start by pushing for a more active commercial-mortgage backed securities (CMBS) market. Brian Lancaster, head of MBS, CMBS and ABS Strategies at the Royal Bank of Scotland (RBS) referred to recent times as the “worst CRE recession ever,” at a Risk Management Association (RMA) Securitization Risk Roundtable Webinar. Despite the barren market for capital, according to sources, RBS is believed to be coming to market with the first CMBS of the year. According to Lancaster, CRE values fell 39.5% from Q207 to Q409, and nearly $100bn in CRE loans will need refinancing this year and next. The downturn has hit the commercial mortgage-backed securities (CMBS) market, with 7% delinquent and 10% in special servicing. CMBS issued from 2005 to 2007 received the most significant downgrades by the credit ratings agencies, said another speaker, David Jacob, executive managing director of Standard & Poor’s (S&P) Global Structured Finance Ratings group. Jacob projects nearly 3,000 Federal Deposit Insurance Corp. (FDIC) institutions are over-exposed to the CRE market and to get CRE back on its feet, securitization needs to be restored to facilitate the massive CRE refinancing needs in the market. CRE refinancing isn’t a barren desert, however. Despite this grim picture, spreads are coming down, setting the stage for CMBS issuance, said Lancaster. One such emergence is Ashford Hospitality Trust (AHT), a self-administered real estate investment trust (REIT) that specializes in the hospitality industry with direct hotel investments, second mortgages, mezzanine loans and sale-leaseback transactions, announced it restructured a $157m loan with Aareal Bank AG. The mortgage was set to mature in August 2011 and is secured by the Hilton La Jolla Torrey Pines in Southern California and the Capital Hilton in Washington, DC. The modification provides a full extension of the loan maturity to August 2013 and provides reduced cash management provisions in exchange for a reduction in the loan balance of $2.5m at closing and another $2.5m over the next twelve months. Since January 2009, Ashford completed $442m of loan extensions, modifications, and refinancing. “We have made very solid progress in addressing loan maturities at a time when hotel lending remains challenging,” said Ashford CEO Monty Bennett. “However, as lodging and capital market conditions improve, we see increasing interest among lenders to consider loans on existing hotel assets backed by high quality owners.” At the RMA Webinar, Jun Han, managing principal of JHP Capital said conditions required to restart the CMBS market include return of investor confidence, profitability in issuance, certainty of execution and favorable capital treatment. Rating agencies can add value, Han said, though “we also should be thoughtful about risk-retention legislation.” The potential for change in the legislative landscape is great, adds Sally Gordon, managing director in the Risk and Quantitative Analysis Group at BlackRock: “Market dynamics may shift from economic fundamentals to technical considerations or political considerations,” she said. “Quants may find themselves getting traded for policy wonks.” Write to Austin Kilgore. The author held no relevant investments.