CMBS face bankruptcy test: Perella

Michael Kramer, a partner at Perella Weinberg Partners, speaks at the 2009 Reuters Restructuring Summit, September 30, 2009.

NEW YORK (Reuters) - Investors in commercial mortgage-backed securities are closely watching two major bankruptcy court cases which will shape the future of the asset class, the head of restructuring for Perella Weinberg Partners said on Wednesday.

The outcome of the bankruptcies of hotel chain Extended Stay and mall operator General Growth Partners will address many of the uncertainties surrounding CMBS, Michael Kramer told the Reuters Restructuring Summit in New York.

"They're going to be very closely watched," Kramer said of the cases. "How to restructure a CMBS portfolio is really what the General Growth situation is about."

Both companies filed for bankruptcy earlier this year, and central to their restructuring has been the treatment of CMBS.

Authorities issued new rules this month that should make it easier to modify securitized mortgages without tax penalties.

The rules allow distressed property owners and servicers of mortgage-backed securities to negotiate modifications to a property's loan at any time. The mortgage no longer needs to be in default or imminent default to procure a modification under the rules.

Kramer said investors will take a harder look at the commercial mortgage-backed securities and key questions that have to be resolved.

"Who can negotiate or how you can negotiate with the lender or the borrower?" said Kramer. "What ability do they have to make modifications or not make modifications?"

Before the market recovers, he said, investors need to be assured of the protections offered.

"So they're going to say, 'OK when it gets into trouble do I have the ability to protect my investment or not? What did I learn from the last round?' That's a natural evolution of the capital market."

CMBS issuance has virtually evaporated since the market peaked in 2007 at $230 billion and the overall market totals $700 billion. Investors are likely to lose as much as $90 billion on commercial mortgage bonds, according to a Deutsche Bank report.

Kramer did not think restructuring Extended Stay and General Growth would necessarily lead to a flood of CMBS-related bankruptcies.

However, "there's a staggering amount of debt in this market," he said.

(Reporting by Tom Hals, editing by Gerald E. McCormick)