Hard times for the holders of CMBS loans.

Structured Credit Investor reports:

This data has come to light on the same day JPM successfully marketed JPMCC 2010-C1; this years biggest CMBS offering [which we have discussed, in depth, during past few days], twice the size of the CMBS structure RBS marketed in May.

The sale went as following [per Wall Street Journal]:

J.P. Morgan Chase Commercial Mortgage Securities Corp. sold a $716.3 million bond backed by commercial mortgages on Friday, the second such deal this year and the first to include a portion without an investment-grade rating.

 

The security, made up of loans to primarily retail stores, is just the fifth CMBS deal since the market froze during the 2008 credit crisis. The sale of the deal is another sign of investors' continued appetite for high-yielding securities, even amid jitters about the health of the global economy, the debt woes of Europe and a rise in delinquency among commercial real estate loans--to nearly 10% from below 1% before the crisis. Aware of the risks, issuers and investors alike are doing their homework on these securities, which is why so few deals have been completed.

 

Many so-called structured-finance deals are taking four to six months to put together, said Paul Norris, senior portfolio manager at Dwight Asset Management in Burlington, Vt. "We expect more deals to come, but it will take time because of the due diligence being done on any structured-finance deals," Norris said. This one has several features typical in securities issued during the market's peak in 2006: It includes loans to multiple borrowers and on differing property types. That complicates the process of assessing creditworthiness Underwriters expect the market for commercial mortgage-backed securities to ramp up in the second half, as institutions try to securitize loans made in the first six months of the year.

 

Barclays Capital researchers estimate total issuance this year will range between $15 billion and $20 billion. The J.P. Morgan offering contains 36 loans secured by first liens on 96 commercial properties. About 71% of the properties are retail stores, and more than 30% are in California or Texas.

The top-rated AAA portion, a $416.12 million slice with a weighted life average of 4.53 years, was priced to yield 3.604%. Norris said the price was about as expected. "It's neither very cheap nor very expensive," he said. "It's right in the middle."

The lowest-rated portion, a $14.3 million slice, was priced to yield 7.759%. Below that was an unrated portion that wasn't marketed at all. This riskiest part of a deal is typically bought by hedge funds or retained by the originator of the bond. A host of money managers, insurance companies and banks bought the deal, Norris said.

 

 

So; congratulations to JPMs Structured Products desk, but one question still remains unanswered; how, exactly, will JPM hedge potential losses from the lowest tranche which has remained sitting on JPM balance sheet.

While it is true the size of said tranche is not alarming, and even if the exposure is not hedged potential loses would not be damaging to the banks balance sheet given the gains bank has locked with marketing of this offering.

Therefore I ask this question in name of all potential future investors who might want to know who, where and based on which pricing method will sell the protection in form of a CDS on a CMBS structure which bears little resemblance to CMBS structures of the past.

I know of no derivatives desks who are willing to act as a counterparty in such a transaction; so JPMs Structured Products desk might have succumbed to hedging its exposure to non-investment grade tranche by buying in-house CDS from their derivatives trading brethren.

While the question is important [if for nothing else than for informative purposes] I do not feel the need to dissect it further. When and if the time comes for these tranches to hit the open market [probably being bought by a hedge fund with an uncontrollable risk appetite and/or hyperinflation trade] will I dig deeper into this issue.

As was noted before; the investment grade tranches are relatively safely structured and investing into an AAA one should not be a risky venture given the quality of the debt in it and the quality of the underlying collateral. Our assessment regarding the yield offered on AAA tranche still stands, and we find the yield too tight but justifiable.

MACRO PICTURE AND FUTURE CMBS MARKET DYNAMICS

Now let us discuss future CMBS prospects analyzing macro-economic indicators which represent the main economic vectors which directly influence CMBS market.

First we would like to note the rate of deterioration in the availability of consumer credit, which will affect lease sellers and lease buyers on the long term. With deteriorating revenues lease buyers will demand lower prices, and the amount of available space in the open market will make their request viable.

For insuring their own competitiveness in the marketplace lease sellers will need to further re-asses the per-square-foot prices. A conservative estimate for the next 3-9 month period is 15%-25% lower per-square-foot prices on a national level.

This is the data issued by the FED on June 7th with regards to consumer credit:

This data is all but assuring for those who hold CRE debt.

And let us not forget that all CMBX traded tranches are legacy tranches; meaning they consist of CRE debt issued in 2006-2007. That debt was priced and issued based on future growth projections which, as we all know, did not come to fruition. So while lower tranches of non-investment grade nature crashed in 2008 following the macro-economic problems, investment grade tranches remained valued quite high.

And then something happened in 2009. All of the sudden CMBX indexes started to diverge from their standard correlation to debt markets and started trading in correlation to equities markets. While that [and some other financing measures ] assured alpha returns for those who bought into particular CMBX tranches, it has seriously skewed the price of said tranches. 

Just to offer you an illustrative example of the movements in CMBX indexes we offer the following table [please note that all lows were achieved in 2008-Q2-2009]

While it is true certain [if not all] AAA tranches have been oversold out of fear, and not based on any rational and analytical assessment of their true value, there is no reason to believe that the value of the loans and collateral underlying the highlighted BBB tranches has gone up 100%+ due to any improvement in either the macro-economic landscape or the future prospect of the debt issuers. Quite the opposite.

While the surge in the price of legacy BBB tranches is a viable and reasonable trade if one expects either strong future growth or hyperinflation; it has no sense whatsoever in the current deflationary environment. We expect the price of said tranches to fall significantly in the close future.

The problem in the AAA tranches is less severe due to the quality of the debt which participates in said tranches structure, we do see a slight fall back in the valuations of those tranches as well, but nowhere as severe as in the BBB ones.

We see nothing but grim prospect for CMBS market in the future, with only possible upside being a result of either liquidity misallocation [due to low borrowing costs for the investors] or high inflationary environment. But the possibility of those occurring is low, and our preferable view is deflation with later transition into stagflation.

These are the charts displaying the CRE price movement data [MIT TBI]:

FEW NOTES ON ABS AND ABX

Few days ago a favorable projection regarding sub-prime default rate was issued by RBS.

Bloomberg reports:

(Bank foreclosure help) Building Strategies For 2006

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By Daron Soto

 Link building is very pain staking process because it consumes lot of time and also see the results only gradually. During the past few years webmaster exchanged mails to other webmaster to gain inbound links to their website which is

commonly called “Link Exchange” during the year 2005 many link farms, link directories and building and selling link website and companies popped up just to carter this sector. Since search engines still value these links like MSN

which gives importance to anchor text links pointing to any website in their algorithm. But after some of the major update of Google in 2005 and especially the Jagger update which was done in 3 phrases over a period of 40 days made

webmasters and SEO experts to give a second through about reciprocal linking.

Reciprocal linking was a method to artificially increase the link popularity of the website and gain search engine ranking. However after Google Jagger 3 update webmaster and website promotion experts learned that their website was

dropped to a few hundreds of pages in the search engine results. What happened was Google discounted or gave no value to those kinds of links build artificially by webmaster to gain link popularity. Besides website which has high quality

inbound links replaced those ranking which was previously enjoyed by other websites. Inbound links doesn’t mean just links pointing to the website; it should be from authority website and should be seen as natural by search engine

spiders. Any kind of artificial method to gain inbound links will be identified by these spider bots and there will be a drop in those particular website ranking.

The important tips and techniques to be used in future link building for 2006 are as follows.

1) Reciprocal link - Before I go further I would like to tell you that reciprocal linking is not dead. For example if you run a website on pets supplies and linking to a dog grooming website it is definitely take in to consideration by search

engine, since it adds value and information for the visitor to these websites.

2) Directories links - A link from Dmoz and yahoo directory is still considered as gold by Google and eventually your website will be included in Google directory is you are listed in Dmoz. Directory submission is not bad idea but if you run

a website related to real estate and submitting to non related directory it is not given value and will be discounted. The quality of the link matters rather than number of links. So try to get links from your Niche areas and directories.

3) Be a Content provider:- This is pretty tough but worth the effort that means give people a reason to link to your website. The reasons could be if you provide information to relate to our niche area on your site. I mean unique content and

where webmaster can’t find these kinds of information and it will be useful to reader in your niche area. Create an article section in your own website, so definitely you will get requests from other webmasters to link to your site.

4) Think out of the box to get links: - Send testimonials for products and services which you have used and ask a link pointing to your website. Conduct interviews with professionals in your niche area.

5) Press release:- Submitting a press release related to new services, features or products which you are launching will have drastic effect to gain links and popularity to your website. Submitting press release is fast catching up with

webmasters. There are many publishers and subscribers looking for latest news and content. So by submitting a press release you gain a wide publicity.

6) Submitting articles.- This is a form of viral marketing or like a virus because you articles submitted to article banks and ezine publishers will be picked by hungry webmaster and publisher looking for free reprint content. Imagine this

article which i have written might be picked up in newsletters and online publishers which in turn gain me a free inbound link.

So the bottom line is try to gain maximum inbound links from authority sites and your niche related website. This will definitely make your link building for the year 2006 a better experience and see your website visibility and popularity gain

new heights.

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The Sales Training Sequence: Dealing With Gross sales Objections and Stalls

By daniel augusto

 Most salespeople think of stalls and objections as synonyms. Wrong. Stalls and objections are both things you may pay attention after you have requested for dedication, however an objection is a specific purpose not to buy. In a stallI might like to assume about itthe buyer provides no particular cause for hesitating.

Virtually all salespeople purchase in to the stall. Very few ever get the deal once they do.

What the stalling buyer is de facto saying is this: Im no longer fairly sold yet. Sell me some more. Effectively then, by way of all means, do some extra selling. But do it right. Heres how:

Never problem a stall. Given that the customer offered no specific purpose for hesitating, dont drive him to come up with one by announcing something like, What is it that it is advisable take into consideration? Difficult stalls creates conflict, now not sales.

Dont attempt to manipulate the customer. If youve learned any manipulative gross sales techniques, forget them. They do extra hurt than good. The old feel, felt, discovered technique rarely worked even in its heyday, and it certainly doesnt paintings today.

Establish a Common Stall Breaker. The USB is a capability of your product or your organization that minimizes the threat to the customer who buys. Every company has one. Yours is prone to be a cash-back assure, a no-trouble return coverage, a attempt-and-purchase association, prolonged terms, or an unusually comprehensive warranty. Whatever this capability is, do not current it to the buyer up front. Hold the USB in reserve, in case you listen a stall whenever you ask for commitment.

Once you do hear a stall, observe this process:

Say, I understand.

Restate the product features the customer preferred before the stall arose.

Present the USB.

Ask for commitment again.

It works like this: I understand. You like ____, _____, and ____ approximately our product. With our _____ coverage (the USB), you may attempt it and not using a threat at all. How does that sound? (Customer responds.) Might you wish to pass forward with it then?

Some distance too many salespeople fail to invite for commitment even as soon as in a sales call. With this stall-breaking technique, you would possibly be asking twice. And you have got got followed the buyers lead by means of doing exactly what the stall actually asked you to do: Sell me a few more.

Imagine it, you’ll make more gross sales!

In The Subject:

Equity Residential is the biggest house leasing company in the United States. In a tricky economic climate, Fairness determined to put money into creating the selling expertise and sales strategy of its leasing consultants. Evidently, these experts usually pay attention stalls equivalent to, Let me think about it and Ill get again to you.

Equity has a Service Promise Assure that minimizes the threat for patrons who select to rent. But previous to the Action Selling Sales Coaching Application we introduced our Carrier Promise Assure as just another function, stated Jonakan OSteen, director of schooling and management development. With their eyes opened to a brand new means of taking a look at stalls, Fairnesss experts shortly identified the guarantee as their Common Stall Breaker. That is now how they use it.

Its simple to get stalled while operating with leases, OSteen said. Or, rather, it used to be.

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