CMBS: Still Melting

The implosion of the CMBS market continues today. AAA tranches of the CMBX are 100 basis points wider. Cash bonds are 200 basis points wider. As an aside, I lack proficiency in the world of CMBS so if someone sees an error please jump in and correct me.

Anyway, the cash AAA bonds which I note above are super senior and are packaged for the bondholders’ enjoyment with 30 percent credit enhancement. They are designed to absorb enormous stress. I am not sure how much the landscape would need to mimic 1929 before these things are wounded, but they are designed to withstand a lot of pain.

My belabored point is that at current levels they are Libor + 1200 which is somewhere north of 14 percent.

One participant citing that yield level noted that sales at these levels can only be motivated by fear and panic.

There are some other factors involved in the panic. I mentioned the failure of the TARP to purchase assets. Anticipation of the TARP led some shorts to keep their powder dry. Those shorts are now happily establishing positions.

Additionally, two loans which comprise a large portion of a deal in the index soured yesterday and that struck fear into the hearts of participants.

And one participant noted that overall dismal state of the economy was likely to lead to a glut of office space.

Comments

[SCGH:]

My family is in retail and there are rumors there are massive delinquincies in numerous properties (SPG, GGP, Westfield) in Southern California from the retailers they are talking to. Many stores are negative cashflow and have been for months.

2008 Nov 19 06:41 PM

[Dark Space:]

The are some important takeaways. Everyone thinks that malls will suffer as more and more retail tenants fail, and office space will suffer as more folks are laid off, and at the end of the day a lot of loans were underwritten poorly and will fail. Not only does everyone know it, but we have for awhile - the two big CMBS delinquencies on the front pages last week were expected to fail by many as soon as they showed up in the deal.

The 30% AAAs in CMBS is strong protection, even taking into account all the weak factors. If every mortgage defaults and the properties are sold for 50% of the value their previous owner paid, then, and only then, do these begin to take some losses. So, to compare to the great depression... To borrow from someone else's work a little, you need to pick the worst 10-year period from the great depression (because CMBS bonds are 10-year bonds), and you get a 29% default rate on a group of unsecured and secured corporate debt. That is a proxy, and doesn't include recoveries. If you assume that there were $0 in recoveries (which is not accurate), the AAAs still do not take losses.

2008 Nov 22 10:50 AM