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Transcript of cmbsreport_rbs
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September 2 2010Please see the last page of this publication for important disclosures.
Brian Lancaster
MBS, CMBS & ABS Strategy
+1 203 897 6078
Richard Hill
MBS, CMBS & ABS St
+1 203 897 4679
Joseph Ruszkowski
MBS, CMBS & ABS Strategy
+1 203 897 4653
www.rbsm.com/strategy
rategy
de Value in
Environmentigh yielding
alternatives for some time now. While CMBS is obviously more
MBS currently offers
55 basis points of pickup in spread versus corporate bonds (Figure 1).
| S p e c i a l R e p o r t
2007 Vintage AMs Provi
a Compressing Yield Super senior CMBS have benefited from a lack of h
complicated to analyze than corporate bonds, C
Figure 1: Historical 10 Year AAA CMBS vs. 7-10 Year Corporates
0
200
400
600
800
1,000
1,200
1,400
1,600
A u g -
C M B S S t r a
t e g y
0 6 - 0 6
b - 0 7
a y - 0 7 0 7 - 0 7
b - 0 8
a y - 0 8 0 8 - 0 8
b - 0 9
N o v
F e M A u g -
N o v
F e M A u g -
N o v
F e M a y - 0 9
A u g - 0 9
N o v - 0 9
F e b - 1 0
M a y - 1 0
A u g - 1 0
S p r e a d t o L i b o r / S w a
p s
10 yr AAA CMBS Spread AAA/AA 7-10 Year US Broad IG Bond Index
BBB 7-10 Year US Broad IG Bond Index
Source: RBS, The Yield Book
Figure 2: 10 Year AAA CMBS vs. 7-10 Year Corporates (Since2008)
0
50
100
150
200
S p r e a d
250
300
350
400
450
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10
t o
L i b o r
10 yr AAA CMBS Spread AAA/AA 7-10 Year US Broad IG Bond Index
BBB 7-10 Year US Broad IG Bond Index
Source: RBS, The Yield Book
While we believe CMBS is still attractive versus corporates, yields have
fallen significantly as have those on nearly all fixed income investments
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The Royal Bank of Scotland
C M B S S t
t
| S
i l R
t | S
t
b
2 2 0 1 0
2
int traded inside of S+ 290
basis points resulting in an historically low yield of less than 5%.
Figure 3: Historical GG10 Spread / Price / Yields
For example, in August, GG10 A4s at one po
0
200
400
600
800
1,000
1,200
1,4001,600
1,800
2,000
J u
O c t -
J a n -
A p r -
J u l
O c t -
J a n -
A p r -
J u l
O c t - l -
0 7
0 7
0 8
0 8
- 0 8
0 8
-
J a n - 1 0
A p r - 1 0
J u l - 1 0
Y i e l d
( B p s )
40
50
60
70
80
90
100
110
D o l l a r P x ( $ )
0 9
0 9
0 9
0 9
Implied Swap Rate (Bps) GG10 Spread to Swaps (Bps) GG10 $ Price
Source: RBS, The Yield Book
As a result, investors have recently stepped up
moving down to the next safest part of the CMBS
AM class. This is reinforced by a sense that comm
fundamentals appear to be stabilizing.
their search for yield by
capital structure - the
ercial real estate
e focusing on the AM
art because they have
es. Conversely, many
bonds of more recent
vintages, such as 2007, as they are perceived as an asset class to
tors, such as life
6 vintage AMs has
se bonds now price
ss rather than dollar
s for 2005 and first
ss of BSCMS 2006-
+ 450 bps (6.11%
dollar price of nearly par. A month ago this same
bond traded at a price in the low $90s, a rise of nearly 10 points. In
contrast, 2007 vintage AMs have risen in price only several points. For instance, MSC 2007-IQ15 traded at $85 on August 2, 2010 and now
trades only 3 points higher at $88 as of September 1, 2010
While we don’t disagree with the move in earlier vintage AMs, we think
investors looking for yield at this point, with a little homework, can find
better relative value in the AMs off of many higher quality second half
2006 and 2007 vintage deals. Our analysis shows a number of these
bonds will not experience losses.
Within the AM class, real money investors ar
bonds of 2005 and first half 2006 vintages in p
approval to purchase many deals of these vintag
typically don’t have approval to purchase the AM
carry higher credit risk.
Indeed stepped up buying by real money inves
insurance companies) of 2005 and first half 200
increased to such a point in recent weeks that the
(as of last week) on a spread basis to the A4 cla
price.
This activity has significantly boosted dollar price
half 2006 vintage AMs. For example, the AM cla
PW12 (issued on June 21, 2006) now trades at S
yield) resulting in a
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The Royal Bank of Scotland
C M B S S t
t
| S
i l R
t | S
t
b
2 2 0 1 0
3
s currently trading
sulting in a base case
xpectations of 8.60%
($176 million), (for the analysis please see appendix A), the AM class
to over $452 million1
(22.26%) on MSC 2007-1Q15 before the loss adjusted yield of the AMh we have observed
).
s being
ould have
intages, not less. This is
later second half 2006 and 2007 vintage bonds have longer
wer dollar
longer maturities. This
ese later vintage
wngrades by the
rating agencies which could reduce liquidity. However, we would note
ve already been downgraded
with only a handful on watch for further downgrade.
s that we believe
Analysis
s of MSC 2007-IQ15
and calculated base cumulative loss expectations of 8.60% ($176
oans totaling over $27
everity of 41% ($176
are balloon maturity
d average loss
rticular concern:
and Wellington. We
ns in Appendix A.
Metroplex: The property is 211,734 square foot mixed use (retail /
office) development in San Diego, CA built in 1991. In February 2010,
minent payment
ng receipt of a borrower hardship letter. The property has
experienced a significant decrease in revenue and occupancy (tenantconcentration of furniture galleries and design related stores) due to
the economic downturn. We have performed a comp sales analysis of
the property and believe a loss severity of 77.5% or $31.17 million is
reasonable.
For example, the AM class off of MSC 2007-IQ15 i
(as of September 1, 2010) at $88 (S + 626bps) re
yield of 8.38%. Given our base cumulative loss e
does not experience a loss.
In fact, cumulative losses would have to increase
class falls below 6% (the base case yield at whic
that many 2005 and first half 2006 vintage AMs are trading
Additionally, after adjusting for credit quality and all other thing
equal, in a falling rate environment these bonds sh
appreciated a bit more in price than earlier v
because
durations than earlier vintage AMs both because of their lo
prices (resulting in a higher PO component) and
reinforces our view that value can be found in th
higher quality AMs
One concern some investors may have is potential do
that most AMs regardless of vintage ha
Please call us to further discuss additional bond
provide value.
Appendix A: MSC 2007-IQ15 Loan
We have performed a “bottoms-up” loss analysi
million). Our loss expectation is based on 26 l
million defaulting with a weighted average loss s
million). Of these 26 loans, 9 (totaling $142 million)
defaults due to inability to refinance (at a weighte
severity of 16.4%). The following loans are of pa
Metroplex, Jackson Portfolio, Steadfast Heritage
have provided further analysis of each of these loa
the loan transferred to the special servicer for im
default followi
1
Based upon a 6.75 CDR, 50% severity and 18-month recovery lag on loans that are not otherwisedefaulted in our loss model.
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The Royal Bank of Scotland
C M B S S t
t
| S
i l R
t | S
t
b
2 2 0 1 0
4
s of five apartment
een 1979 and 2001.
of Memphis). The loan
praisal valued the
t $36.2 million. Based upon a 10% haircut to this valuation
and less closing costs, we believe a loss severity of 54.64% or $35.5
square foot anchored
f Portland). The
In October 2009, the
y. The borrower
n into the property and is
bsurface Investigation
Report was ordered which found no significant impacts to the site. The
re. Discounting the
nd less closing
7 million is reasonable.
mixed use (retail /ach MSA) built in 2006
The loan was transferred
he special servicer in August 2009 for delinquency, counsel filed
foreclosure action and a receiver was appointment. Pursuit of the
borrower is also being analyzed due to misappropriation of funds after
appointment of the receiver. A January 2010 appraisal valued the
property at $17.3 million. Discounting this appraisal by 10% and less
closing costs, we believe a loss severity of 52% or $15 million is
reasonable.
Jackson Portfolio Roll-Up: The portfolio consist
complexes (total of 903 units) that were built betw
The properties are in Jackson, TN (88 miles NE
went REO in September 2009. A March 2010 ap
property a
million is reasonable.
Steadfast Heritage: The property is a 288,853
retail property in Albany, Oregon (70 miles south o
property was built in 1988 and renovated in 2006.
loan transferred to special servicing for delinquenc
indicated it has invested $5 million to $6 millio
not willing to invest more. A Phase II – Limited Su
special servicer is now proceeding with foreclosu
December 2009 appraisal of $19 million by 10% a
costs, we believe a loss severity of 58% or $21.
Wellington: The property is a 96,711 square footoffice) property in Wellington, FL (West Palm, Be
/ 2007. The property was built in 2006/2007.
to t
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The Royal Bank of Scotland
C M B S S t
t
| S
i l R
t | S
t
b
2 2 0 1 0
5
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