Leverage Loan Wall of Debt
The default rate on US CMBS has reached its highest rate in 15 years and is not expected to peak until 2011. The .63% default rate is the largest jump since 1992. Costar says "Real Estate Econometrics attributed the default surge to rising vacancy rates, falling rents and increasing operating expenses all of which made it more difficult for borrowers to meet principal and interest obligations. Those borrowers who had been current were not able to refinance or sell their properties in order to meet balloon payments required by maturing mortgages because of the tight lending markets." More info here, http://bit.ly/18caRN
Wall Street Nation speculates that TALF has had slowed the impact on defaulted CMBS loans. He also quotes Sam Zell’s opinion that the REIT meltdown is overblown. More info here, http://wallstnation.com/GGP_0615209.html
However, The Deal Magazine speaks about the $3.6 Trillion wall of leverage which is the cumulative amount of leveraged loans issued since 2000. They say "This strategy was predicated on faith that loans could be continually refinanced, that exit options in the form of the equity markets or mergers and acquisitions fueled by more financing would be easily available and lead to profits that justified the outsized risk the sponsors were taking.". Recent examples of those who suffered from this strategy are Six Flags Great Adventure and General Growth Properties.
"According to Dave Preston, a structured products analyst at Wachovia Capital Markets LLC, the surge in the loan market between 2003 and 2007 was prompted by a concurrent surge in the creation of collateralized loan obligations — structured funds similar to the collateralized debt obligations that bought mortgage-backed securities — that invested primarily in leveraged loans. Preston estimates the yearly volume of CLO creation jumped from $52 million in 1997 to $85.9 billion in 2007, with the vehicles responsible for about 66% of loan demand at the height of the credit boom.
But that demand will not return. Preston says existing CLOs, which are still returning money to investors, will themselves hit the end of their reinvestment periods between 2011 and 2014, meaning they won’t be able to use cash in their vehicles to buy new loans."
More info here, http://bit.ly/11RRLr
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