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Shopping Centers Today -> September 2003
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UPPER-CLASS BOND OFFERS PROTECTION IN CMBS DEALS
The commercial-mortgage-backed securities market recently completed three deals prioritizing payment among the highest levels of their bond structures. Retail real estate mortgages figured prominently in all three.
These transactions involved so-called super-senior triple-A bonds, which offer special protection that makes them more attractive to investors.
Normally, CMBS deals include several bond classes, from triple-A down to triple-B-minus. Holders of the highest classes get repaid first; bondholders at the bottom are last. Importantly, if for some reason the borrower misses a payment, the bondholders of the lowest classes lose out first.
For a long time triple-A-rated CMBS bonds had their own hierarchy of repayment that paralleled that of those other bonds — some triple-A classes were repaid sooner than others, observed Tad Philipp, a managing director of CMBS ratings at Moody’s Investors Service. If there was a delinquency, though, the classes merged and shared the loss. That goes out of the window with the new class of bond, which introduces a special level of protection, meaning that lower-class triple-A bonds will have to suffer the losses alone.
The CMBS market came up with the new structure for two main reasons. First, it appears that lower-class triple-A bonds pay slightly better yields than the more senior bonds, notes a Citigroup report released in mid-July. Second, some triple-A bondholders wanted an extra layer of protection from defaults and downgrades. After all, delinquencies are rising sharply on real estate loans, particularly on hotels and nursing homes. Retail real estate loans turn in lower delinquency rates, but they’re still nearing the 2 percent mark. Given a securitized real estate loan market of nearly $400 billion, 2 percent starts to add up, Philipp notes.
For the past several quarters, rating-agency downgrades on CMBS deals have outnumbered upgrades, says Philipp, whereas five years ago, the opposite was true.
“As downgrades are occurring more often, investors may be seeking bonds with more downgrade protection,” he said.
But are investment bankers adding an extra layer of complication — and possibly risk — to CMBS deals by slicing the triple-A classes in this way? No, say players. The bigger concern is that a bankruptcy or other threat to a company’s credit could undermine its ability to repay.
“If it keeps the market liquid, it is a good thing,” said Bernard Freibaum, CFO of General Growth Properties. General Growth’s $232 million mortgage on Glendale (Calif.) Galleria constitutes the largest portion of one of the pioneering deals.
Another
of the deals was brought to market by Credit Suisse First Boston,
with its total $423 million mortgages on Holyoke (Mass.) Mall and
Crossgates Mall, Guilderland, N.Y., which together accounted for
48 percent of the entire deal. The third was a Morgan Stanley deal
— a $365 million mortgage on a portfolio of six centers in
Puerto Rico (five of them anchored by Wal-Mart) that represented
27.9 percent of the deal.
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