Posts Tagged ‘capital markets’

Covered Bonds Could Be a Viable Alternative to CMBS

Monday, November 15th, 2010

A financing vehicle invested in Prussia in 1769 could be the solution to failed #CMBS.A financing vehicle that has been used in Europe since it was invented in Prussia in 1769 is finding its way to American shores as a replacement for commercial mortgage-backed securities (CMBS).  The vehicle is known as covered bonds, which is a securitized debt instrument backed by a pool of top-quality assets, primarily mortgages. What is different about covered bonds is that the assets – known as a cover pool – are maintained on the issuer’s balance sheet.  This acts as a safety measure because the issuer is less likely to underwrite loans that carry significant risk.

Currently, the United States has no established market for covered bonds, although they are a $3 trillion business in Europe.  In July, the House Financial Services Committee approved a bill that would establish a regulatory framework for covered bonds.  Although the bill just missed being included in the Dodd-Frank financial reform overhaul, the consensus is that the legislation could win House and Senate approval in 2011.

“We have seen the difficulties wrought by the complexity of securitizations,” said Bert Ely, a financial and monetary policy consultant.  “Covered bonds, on the other hand, are a very clean and simple tool.  A bank makes a loan, keeps the loan on its books, and issues a covered bond.  There is no sale and resale of mortgages.”  With a covered bond, several elements protect the bondholder.  All assets in the covered pool are subject to monthly monitoring by an independent third party.  If one of the loans becomes non-performing, the issuer must remove it and replace it with a loan that is performing.  Thanks to the safety features, the majority of covered bonds enjoy a triple-A rating.

Despite the fact that many in the investment community support covered bonds, the Federal Deposit Insurance Company (FDIC) has some concerns about them.  Primary is the fact that the pools are over-collateralized – sometimes by as much as three times the bonds’ face value.  The FDIC wants access to these assets when a bankruptcy occurs.  The FDIC argues that if the cover pools protect the bulk of the banks’ assets from being claimed, the depositors are being asked to take on too much risk.  “We support covered bond legislation, but not at the expense of our obligation to protect the deposit insurance fund,” said the FDIC’s Michael H. Krimminger.

Congress Will Examine the Fed’s Actions During the Financial Crisis

Tuesday, May 25th, 2010

A bipartisan Senate votes to investigate the Fed’s actions before and during the financial crisis.  In a rare moment of bipartisanship, the Senate voted 96 – 0 to attach a modified version of an amendment proposed by Sen. Bernard Sanders (I-VT) to the financial regulatory bill to investigate transparency in emergency lending practices by the Federal Reserve during the financial crisis.  “This amendment begins the process of lifting the veil of secrecy of perhaps the most powerful federal agency,” Sanders said.  The vote also is a nod to public frustration with the government’s Wall Street bailout.

President Barack Obama has asked Congress to enact reform legislation that will make capital markets less susceptible to crises.  The Senate’s vote will clarify the Fed’s emergency lending practices during the crisis when it put hundreds of billions of dollars into the financial markets to stabilize the economy.  The proposal marks the first time the Fed has been investigated this thoroughly by Congress.

The Senate wants to scrutinize the Fed’s role in the time leading up to and during the financial crisis to determine if there were any regulatory gaffes.  Passage of the amendment allows a one-time audit of the Fed’s emergency lending since December 2007.  Additionally, the Fed will have to publicly disclose detailed data about which financial institutions it has lent money to by December 1.  Although the Fed initially was uneasy about the audit, its comfort level has now improved.  According to Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, “I’m comfortable with the modified Sanders amendment.”

Chicago Pours a Tall One to Secure MillerCoors Deal

Tuesday, April 14th, 2009

To sweeten the pot after luring brewing giant MillerCoors LLC to the Windy City, the City of Chicagocoors-light-logo11 has agreed to create a $6 million tax-increment financing deal for the firm’s new corporate headquarters at 250 South Wacker Drive.  Even with a budget shortfall nudging $500 million, the City is kicking in significant funds to bring home more than 300 new jobs.  This deal is also heartening affirmation that the frozen capital markets are starting to flow once again.

The City’s subsidy, approved by the Community Development Commission, provides 27.5 percent of the $21.8 million that MillerCoors needs to renovate its 129,122 SF headquarters on nine floors of the 14-story building.  During 2006, 250 South Wacker Drive was renovated to replace or update all infrastructure systems.  The structure now boasts an energy-efficient “Chill Beam” HVAC system and low-e glass, and qualifies as a next-generation green building.

Last July, MillerCoors – a joint venture of Molson Coors Brewing Co. and SABMiller PLC – chose Chicago as the headquarters of its merged operations that previously had headquarters in Milwaukee and Denver.  The agreement requires MillerCoors to employ at least 325 employees at its headquarters within five years.

How Will President Obama Impact Commercial Real Estate? Part 1

Thursday, December 18th, 2008

With change expected to begin in Washington, D.C., on January 20, 2009, the commercial real estate industry is bracing itself for the incoming Obama administration and the 111th Congress.  CoStar Advisor recently polled commercial real estate professionals on the top issues of the first 100 days.  The resulting list includes such policy issues as saying “no” to capital-gains increases and other investment taxes; moving forcefully to stabilize the Treasury and capital markets; suspending market rules regulating perceived asset value; making the biggest investment in the public infrastructure since the 1950s; and reforming Fannie Mae and Freddie Mac.

The overall attitude within the industry, according to a poll by National Real Estate Investor, is negative because of Obama’s plan to hike taxes on dividend income, capital gains and high-earning individuals.  The poll notes that 54 percent of responders are registered Republicans.

So, should our industry be wary of the new team?

Rising Inflation Rates Demand Caution When Investing

Tuesday, December 2nd, 2008

Inflation has returned with a vengeance, with a 1.1 percent increase reported during June – courtesy of soaring energy and food prices.  The Federal Reserve reacted to the warning signs on June 25, when it froze the Fed funds rate at two percent – ending nine months of rate cuts that it hoped would revive the shaky economy.  Right now, the Fed believes that rising food and energy costs will negatively impact the economy for several quarters to come.  Consumers agree.  A survey conducted by the University of Michigan’s Year-Ahead Inflation Survey concluded that consumers believe inflation will reach an annual rate of 5.2 next year, the highest level since 1982.  Because they feel so pinched, people will be extremely cautious with their money.

Typically in an inflationary environment, investors look to lock their capital into assets that will protect value over the long term.  However, every time the Fed hikes its overnight fund rates, it becomes more expensive for banks to lend money.  So we have the capital markets acting as a restraint against the natural cycle of surging reinvestment in an inflationary environment.  The best advice for investors seeking a haven is to focus on quality – triple-net-leased, high-credit buildings in strong markets.  These buildings will protect the value of capital and even have good prospects for appreciation.

As consumers, we have the deflationary economy until the dwindling profits hit our businesses.  What’s the best way to ease the slide?

Capital Markets

Monday, June 16th, 2008

One of the biggest issues we’ve faced is the stability of the capital markets, which are slow but showing some signs of life.  You have to look closely, but there are some positive signs.  At the end of March, two office properties sold for more than $500,000,000 each.  These included the UBS Tower in Chicago, which Hines Interests purchased for $540 million and the Altria building in New York, which Global Holdings (the Ofer family) purchased for $525 million.  Prices for office properties nationally are off just two percent from their peak during the second quarter of 2007, according to Moody’s/REAL Commercial Property Price index.  One exception, after accounting for well over half of 2007 sales volume, portfolio sales are rare in 2008.

Titanic Healthcare

Monday, April 7th, 2008

The February issue of Healthcare Real Estate Insights reported on the Titanic of MOB transactions – the acquisition of 28 medical office buildings (MOBs) by Nationwide Health Properties, a healthcare REIT based in Newport, CA. The deal, worth $915 million, included a portfolio of existing and future MOBs totaling 2 million SF. There is no question that, with its stable earnings and NOI, healthcare real estate has some of the strongest fundamentals in the real estate industry (there are now 13 healthcare REITs). The reasons for this have been amply reported – the retirement of 76 million Baby Boomers, the migration of services from inpatient to outpatient environments (especially MOBs); and healthcare’s preeminence as an economic engine. Between 2007 and 2015, 3 out of 10 jobs will be in healthcare; 20% of the GDP will be healthcare by the same date. Sales of MOBs in 2007 came in at just under $5 billion according to Real Capital Analytics, Inc, and CEL Associates. We see no sign of this trend abating with our current demographics (almost 40% of the population will be over 55 by 2010). The wildcard may be the capital markets, particularly the bond market which has been affected by the fluctuations owing the subprime crisis. Considering that hospitals still rely on bond issues to fund development, they may be confronted by a changing risk profile on transactions and a resultant rise in interest rates. In light of this, third-party healthcare real estate developers with strong balance sheets become even more important because of their ability to finance and even own facilities without contingencies.

Keep Your Eye on the Little Guy

Monday, March 24th, 2008

With the current upheaval in the capital markets and the news that Citigroup, Merrill Lynch and Morgan Stanley have written off $70 billion in loans, it is interesting to note a whole cadre of financial institutions that are doing gangbusters.  According to an article in the 2/19/08 USA Today by Matt Krantz, smaller banks which avoided the enticement of lowering underwriting standards and issuing subprime loans, are on average, only 6% off their 52 week high.  Most of these names are unfamiliar — Danvers, First Merchants and Oriental Financial.  As the heavily leveraged buyers retrench and the access to bridge loans and mezzanine financing pulls back, could we see a number of well capitalized small cap financial institutions step in to fill the void in the commercial real estate investment market?