Yields on commercial mortgage bonds relative to benchmark rates rose to record highs on concern that Lehman Brothers Holdings Inc. may dump its real estate on the market after filing for bankruptcy.
Spreads on AAA rated commercial mortgage-backed debt rose 41.25 basis points to 318.81 basis points more than benchmark swap rates as of yesterday’s close, Bank of America Corp. data show. The previous record of 312.35 basis points was set March 10, the week before the Federal Reserve arranged JPMorgan Chase & Co.’s purchase of Bear Stearns Cos. A basis point is 0.01 percentage point.
“A bankruptcy is not a positive for any credit products,” said Lisa Pendergast, an analyst at RBS Greenwich Capital in Greenwich, Connecticut. “There is a concern that as Lehman moves into bankruptcy, the liquidation will put pressure on the prices of all commercial mortgage securities.”
The $776 billion market for commercial-mortgage debt may plummet further if more financial institutions fail and have to sell assets. Since the start of last year, banks worldwide have taken more than $514 billion in writedowns and credit losses amid the worst housing slump since the Great Depression.
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How Lehman Hurts Commercial Real Estate
by David Bodamer September 16th, 2008
I’m still trying to get my head around the implications that Lehman’s collapse has for the commercial real estate sector. As I see it, there are a handful of ways this is negative or potentially negative for the sector. If you’ve got any feedback or disagreements, let me know in the comments section.
I. Values: Lehman’s sitting on $32.6 billion in commercial real estate investments in the form of loans and equities. It was a big investor in commercial mortgage-backed securities. What’s it going to do with that? Will it still roll those holdings into the bank it talked about last week? Or will it try to sell this stuff on the market. Right now, investors are so skittish about any kind of securitized debt, Lehman may have to sell at deep losses. That, in turn, will force other holders of CMBS bonds to “mark to market” based on Lehman’s precedent. So we’re looking at a real potential drop in perceived values of CMBS bonds. That could also have effects on determining the value of actual real estate. If the CMBS valuations are to be believed, it would imply deep discounts on actual property values. The industry had been hoping that the correction would be 10 to 15 percent. Now it’s looking like it may be a steeper drop than that.
A perceived drop in values of real estate is also going to hurt retail REITs. The correction in REIT stock prices had settled in at a 10 percent to 20 percent drop from 52-week highs. Now it’s looking like REITs are going head lower again.
II. Lending: In turn, the Read the rest of this entry »
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