Jones Lang LaSalle & Jones Lang LaSalle Hotels – Debt Capital Markets Bi-Monthly Update
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Jones Lang LaSalle & Jones Lang LaSalle Hotels – Debt Capital Markets Bi-Monthly Update
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Category: Worldwide - Industry economy
- Figures / Studies
This is a press release selected by our editorial committee and published online for free on 2009-06-16
Market Indices: Current Two Weeks Ago 6 Mos Ago April 2008
(6/10/09) (5/27/09) (12/10/08) (6/10/08)
1-Mo LIBOR 0.32 0.32 1.44 2.48
5-Year Treasury 2.91 2.43 1.62 3.54
10-Year Treasury 3.92 3.71 2.69 4.11
5-Year Swap 3.45 2.85 2.59 4.42
10-Year Swap 4.30 3.82 2.97 4.78
Market Commentary:
The debt capital markets are optimistically awaiting the implementation of government backed liquidity programs. The Federal Reserve’s recent announcement that the Term Asset-Backed Loan Facility (“TALF”) will include “seasoned” fixed rate super-senior AAA CMBS (in addition to “newly issued” CMBS) generated praise among market participants, and helped fuel an ongoing CMBS rally. However, Standard & Poor’s quickly put a damper on the rally when they announced revised underwriting standards that would downgrade 90% of the outstanding 2007 vintage AAA CMBS bonds. These downgrades could have a direct impact on the ability of investors to pledge existing AAA CMBS as collateral for a TALF loan, given that the collateral may no longer be eligible according the TALF guidelines. However, investors have expressed optimism that TALF guidelines may be expanded to all securities “originally” rated AAA
Nonetheless, lenders/investors continue to view TALF as a means to deliver cheaper debt financing that will increase liquidity in real estate markets, and eventually drive down debt cost to a point where CMBS loans can be originated at levels viewed as both acceptable to borrowers and profitable for dealers/lenders. Interest rates for new loans originated under TALF could initially range from 8.5% to 10% assuming a 60% LTV and 40% LTV being rated AAA. That pricing is a tough pill to swallow for prospective borrowers on new acquisitions, but a necessary evil for borrower’s faced with maturing loans with little or no refinancing alternatives. The hope is that with subsequent funding periods and demonstrated success, spreads will tighten to a level where loans can be originated with coupons in the 7% to 8% range.
It appears that the governmental programs may spur the CMBS market to re-invent itself with a “back-to-basics” approach --- i.e. single-borrower securitizations (a practice prevalent in the early days of CMBS). Jones Lang LaSalle’s Real Estate Investment Banking group (“REIB”) is tracking several large, well capitalized borrower’s who are actively exploring single-borrower, TALF-backed securitizations (collateralized by pools of owned/unencumbered assets) with both rating agencies reviewing transactions in advance of the first TALF funding. Such a financing mechanism would ultimately act as a cheaper alternative to raising equity and/or unsecured mezzanine debt.
The level of investor interest has incited several lending institutions and life insurance companies to explore TALF backed CMBS executions. The collateral pools would contain both refinanced mortgages for existing customers, as well as mortgages to new clients. These lenders have indicated that intention would be to sell AAA rated CMBS bonds to investors (who pledge them as collateral to TALF), while retaining a portion of the subordinate bonds; a practice which would keep the loan originator in the first loss position.
One concern is that the emphasis on the AAA component of deals under the new CMBS programs will lead only to further competition with the few lenders in the market for the “gold-plated” loans and sponsors and not open the credit spigot for the majority of commercial real estate owners. Furthermore, such loans are likely to initially be “large loans” given the potentially lengthy amount of time required to originate a sizeable pool of smaller conduit loans necessary to develop critical mass for a conduit securitization. A second concern weighing on the real estate capital markets is the announcement by the FDIC that development of the Legacy Loans Program (LLP) will continue for loans sold out of banks in receivership, but that a previously planned pilot sale of “toxic” assets by “going concern” banks will be postponed. At the end of the day, while there is a newfound optimism in the real estate capital markets that the government initiatives will take hold and regenerate liquidity in the system, it is checked by concern about the viability of the initiatives and an uncertainty about whether the liquidity will be widespread, or concentrated on the few properties that are already able to obtain financing.
HOTEL ADDENDUM
The overarching sentiment amongst lenders at the recent NYU hospitality conference was one of cautious optimism. Jones Lang LaSalle met with more than a dozen lenders at the conference to gauge their level of interest and activity in originating new loans and selling loans off their books, as well as how they approach workout situations. Here are our take-aways:
1.Originating New Debt: lenders are still casting a wary eye on hospitality and several prominent lenders have put their hotel origination programs on hold. However, JLL also spoke with multiple lenders that are actively looking to lend on hospitality. Their mantra, of course, is strong cash flow and excellent sponsorship, but lenders are beginning to take a more creative and opportunistic approach to capitalize on a favorable lending environment.
2.Note Sales: many lenders currently holding hotel loans on their books take a view similar to that of owners—namely that values are irrationally low at this time and it is worth holding on to these mortgages. Lenders will transact for the right price and encouraged JLL to bring them viable buyers, but to date the bid-ask gap has been too wide and they are generally not looking to hold a fire sale.
3.Approach to Workout Situations: given the complexity in owning hospitality real estate, balance sheet lenders are generally inclined to pursue workouts with borrowers. However, they are closely analyzing the value of the debt relative to the value of the property and seeking viable business plans that address their exit. Lenders are strongly encouraging borrowers to work with advisors to price the market on both debt and asset value and develop a strategic plan prior to approaching them for a workout solution.
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