Posts Tagged ‘maturing loans’

Lehman Brothers Workout Could Take Three to Five Years

Tuesday, October 6th, 2009

1105000_lehman_brothersCleaning up the mess left by Lehman Brothers’ collapse and bankruptcy involves salvaging a national portfolio of 900 properties valued at $16 billion.  What the advisory firm overseeing Lehman’s bankruptcy achieves could be a framework for the strategies that big banks across the country use as they deal with their own troubled assets whose loans are maturing over the next 18 months.

According to Bryan Marsal, the head of Alvarez & Marsal, the advisory firm overseeing Lehman’s bankruptcy proceedings, “It’s not a great time to sell today.  We are not passively waiting for a better market.”  Marsal’s firm has 66 people overseeing the Lehman portfolio, as well as 250 outside contractors.  Describing the effort as the “biggest workout department in the U.S.,” Marsal estimates that it could take his team three to five years to complete the wind down of Lehman with its creditors and in federal bankruptcy court.

Lehman’s restructuring could provide a lesson for U.S. banks and thrifts holding more than $1.2 trillion in commercial mortgages backed by office buildings, hotels, shopping malls and apartments.  With falling property values and tight credit, commercial property lenders’ losses could total as much as $115 to $150 billion, according to a Deutsche Bank AG report.

The Lehman portfolio clearly demonstrates the depth of losses across the board.  One group of properties fell in value by an estimated $5.4 billion between the weekend of its bankruptcy filing and December 31.  This was due to a combination of a deteriorating market and unrealistically high valuations prior to the bankruptcy filing.

Bad Debt? Sell It on the Stock Market

Thursday, July 30th, 2009

To purge their balance sheets of debt and avoid future writedowns, more and more U.K. banks are considering plans to transfer commercial property loans into REITs. Such strategies entail using REITs as publicly traded “exit vehicles” to limit the losses they and their borrowers face.

uk-stock-market The British Property Federation is currently pushing the idea to the government as a solution for state-owned banks saddled with real estate loans.  Ian Marcus, head of real estate at Credit Suisse Group AG, remarks, “It’s obviously being considered by all relevant parties because the sector needs to recapitalize and that is one methodology of doing so.”

U.K. banks are currently weighed down with 227 billion pounds (US$371 billion) of loans against retail properties, office buildings and warehouses after funding the real estate boom that ended in 2007, reports a De Montfort University study.  According to BNP Paribas, approximately 100 billion pounds of the loans are due to mature in the next three years.

The values of the commercial properties they are secured against have declined by an average 44 percent from their peak two years ago, calculates London-based Investment Property Databank, Ltd.  Peter Cosmetatos, the British Property Federation’s finance director, concludes, “Allowing mortgage REITs would seem a natural and sensible way for REITs to help banks reduce their exposure to real estate and recapitalize the sector.”

It’s an interesting proposition and creates a new play – allowing opportunity players to get undervalued, under-performing loans at the share level.

UK Debt Repayment Dates

UK Debt Repayment Dates

Construction-Loan Delinquencies on the Rise

Monday, June 30th, 2008

The surge in the construction-loan delinquency rate – both residential and commercial – suggests that lenders will remain reluctant to make loans for new construction.

Developers usually finance projects through short-term construction loans.  Once the project has stabilized, the developer seeks long-term debt.  With the current economic downturn, developers are finding it difficult to obtain capital.  This is compounded by a lack of liquidity in the mortgage market.  As a result, projects are worth less than they were a year or two ago.  Lenders also are more stringent in their underwriting standards, preferring highly stabilized projects with significant pre-leasing.

Short-term, the outlook is negative, as maturing loans may have problems refinancing if liquidity is non-existent.

The silver lining is that seasoned developers with strong lending relationships and leased portfolios are better positioned to develop product on an “as-needed-and-warranted” basis.