Banks may struggle this quarter placing a planned $20 billion in commercial mortgage-backed securities related to previously agreed takeovers of marquee companies like Hilton Hotels Corp -- potentially leaving the loans on their balance sheets or forcing price concessions.
Should they be unable to syndicate the debt on favorable terms -- a possibility given that some investors are balking at the loans -- underwriters like Bear Stearns Co Inc would risk write-downs.
Volume was so low in the fourth quarter that $20 billion of anything is going to be a lot, said Larry Duggins, an executive managing director with Centerline Capital Group, a unit of Centerline Holding Co and buyer of commercial mortgage-backed securities, or CMBS.
People are going to proceed slowly and carefully because there's going to be a lot of scrutiny over their purchases.
U.S. CMBS issuance in the fourth quarter was $33 billion, just below the total $35 billion planned for this quarter -- but for single-borrower CMBS, the category often tapped for buyout financing, there hasn't been an issuance since August, according to a Credit Suisse research note.
Planned for this quarter are CMBS offerings related to the pending buyout of Harrah's Entertainment Inc and the completed buyouts of Station Casinos Inc, hotel companies La Quinta Inns and Hilton Hotels, and nursing home operator Manor Care Inc totaling $20 billion, according to Credit Suisse.
Some of these buyout-related offerings were likely targeted for the last quarter, but an unreceptive market probably caused delays and an outsized first quarter calendar, said Christopher Sullivan, chief investment officer for the United Nations' employees federal credit union in New York.
I can't imagine the environment will have improved over much of the first quarter, said Sullivan, citing leverage levels, underwriting standards and recession concerns. We may find further postponements with still wider clearing spreads.
WAIT AND SEE
Many of the planned deals are high quality, said Michael Moran, a senior portfolio manager on Allstate Investment's $20 billion commercial mortgage portfolio; but the sheer size of some offerings may make them difficult to digest.
Among the offerings scheduled for this quarter is a $9 billion Blackstone Group LP issuance backed by Hilton Hotels, which would be the largest CMBS offering ever. The offering is being led by Bear Stearns Cos Inc, Bank of America Corp, Deutsche Bank AG, Goldman Sachs Group Inc and Morgan Stanley, according to Credit Suisse.
Other issues slated for this quarter include two $3 billion issues backed by Manor Care and La Quinta, and a $4 billion offering backed by Harrah's, according to Credit Suisse.
At the right leverage point and right pricing, they can get done, Moran said. We have to wait and see.
The single-borrower issuers may draw decent investor interest since their top-rated portions are typically structured with more protections against losses than conduit issues with multiple loans, said Alan Todd, head of CMBS research at JPMorgan Chase & Co.
But the market has eroded, and issuers won't experience the same strong demand as seen in the Blackstone-Equity Office Properties $6.9 billion CMBS last June, he said.
Until the underwriters find buyers, banks may be burdened by CMBS, which have shown signs of weakening amid loose loan underwriting standards and a slowing economy.
Last month, Moody's Investors Service downgraded the ratings of Bear Stearns, citing risks in its commercial real estate portfolio.
Moody's particularly noted Bear's concentrated risk from its participation in the $26 billion Hilton leveraged buyout transaction, the report said. This exposure is also large relative to the firm's earnings capacity and capital position and suggests elevated risk appetite.
Analysts have also cautioned about CMBS exposure at Wachovia Corp, another top-ranked underwriter.
CMBS-related write-downs may wipe out earnings in the fourth quarter, wrote Howard Mason, an analyst at Sanford C. Bernstein & Co, on December 6.