S&P Awakes From Slumber, Downgrades CMBS

When the Fed decided to open up the Term Auction Lending Facility to newly issued AAA-rated CMBS in March, CMBS investors cheered. The CMBS market has been dead for nearly two years, with zero issuance so far this year and only $10 billion in all of 2008. How’s anyone supposed to make any money if nobody is doing deals? After their success with opening up the TALF to new issuance, commercial real estate investors lobbied the Fed, begged and pleaded to seek inclusion of legacy CMBS, particularly those issued during the highly toxic 2005-2007 era, into the TALF. It seems the market has been “distorted” by the fact that everybody on the planet knows that most of those deals were structured using too little equity and anticipating overly optimistic increases in rent and valuation. Nobody wants to buy these deals anymore, at least not at the prices where current investors are wearing them. So if the Fed could just do everybody a big favor and grease the wheels a little bit, then we could all just get back to the business of doing really moronic commercial real estate deals that make zero financial sense with everyone collecting their fees along the way, leaving the US taxpayer holding the bag. The Fed, of course, complied by allowing legacy CMBS into TALF, much to the chagrin of many a taxpayer that actually understands how disgusting it is that the Fed, who is supposed to be the steward of monetary policy in this country, has somehow morphed into a big supporter of commercial real estate dealmakers that made their own bed, in this case even without the help of unsophisticated subprime lenders. But then something remarkable happened. One of the rating agencies actually woke up from its slumber and decided it must put an end to the madness. Yesterday, S&P warned that it would downgrade billions of dollars of AAA rated CMBS, specifically those issued between 2005-2007, thus making them ineligible for TALF. Now a cynic might claims that perhaps S&P should’ve never rated these deals AAA to begin with, because frankly, they were stupid. But at least they’re doing something now. I would like to offer my gratitude to S&P for finally doing its job, that of protecting investors, which in this case could’ve included all US taxpayers.

Other interesting tidbits in the WSJ Property Report are follow ups to recent posts. First is a quick story about Arcandor’s potential impending insolvency. Arcandor, the German department-store operator is 51% owned by Whitehall Funds, which is run by Goldman Sachs, faces a June 12th deadline to gain an extension on its debt. It is hitting up the German state-owned development bank for a loan, because government funds are the best bet in getting an investor to throw good money after bad these days. In any event, this would be yet another pie in the face of Whitehall Fund investors, not to mention Goldman Sachs.

A follow up to another recent post is an snippet on real estate developer Kent Swig. Last we checked in with Mr. Swig, he was tied up in legal proceedings with the Lehman bankruptcy estate over 25 Broad, a 346-unit luxury condo development that has since soured. Lehman filed to foreclose in January, and last week a New York state court granted a request to appoint a receiver for 25 Broad. No doubt this story will only get more interesting. I'll keep you posted.