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By Jonathan Keehner and Al Yoon
NEW YORK Jan 3 Banks may struggle this quarter
placing a planned $20 billion in commercial mortgage-backed
securities related to previously agreed takeovers of marquee
companies like Hilton Hotels Corp -- potentially leaving the
loans on their balance sheets or forcing price concessions.
Should they be unable to syndicate the debt on favorable
terms -- a possibility given that some investors are balking at
the loans -- underwriters like Bear Stearns Co Inc BSC.N
would risk write-downs.
"Volume was so low in the fourth quarter that $20 billion
of anything is going to be a lot," said Larry Duggins, an
executive managing director with Centerline Capital Group, a
unit of Centerline Holding Co CHC.N and buyer of commercial
mortgage-backed securities, or CMBS.
"People are going to proceed slowly and carefully because
there's going to be a lot of scrutiny over their purchases."
U.S. CMBS issuance in the fourth quarter was $33 billion,
just below the total $35 billion planned for this quarter --
but for single-borrower CMBS, the category often tapped for
buyout financing, there hasn't been an issuance since August,
according to a Credit Suisse research note.
Planned for this quarter are CMBS offerings related to the
pending buyout of Harrah's Entertainment Inc HET.N and the
completed buyouts of Station Casinos Inc, hotel companies La
Quinta Inns and Hilton Hotels, and nursing home operator Manor
Care Inc totaling $20 billion, according to Credit Suisse.
Some of these buyout-related offerings were likely targeted
for the last quarter, but an unreceptive market probably caused
delays and an outsized first quarter calendar, said Christopher
Sullivan, chief investment officer for the United Nations'
employees federal credit union in New York.
"I can't imagine the environment will have improved over
much of the first quarter," said Sullivan, citing leverage
levels, underwriting standards and recession concerns. "We may
find further postponements with still wider clearing spreads."
WAIT AND SEE
Many of the planned deals are high quality, said Michael
Moran, a senior portfolio manager on Allstate Investment's $20
billion commercial mortgage portfolio; but the sheer size of
some offerings may make them difficult to digest.
Among the offerings scheduled for this quarter is a $9
billion Blackstone Group LP (BX.N) issuance backed by Hilton
Hotels, which would be the largest CMBS offering ever. The
offering is being led by Bear Stearns Cos Inc BSC.N, Bank of
America Corp (BAC.N), Deutsche Bank AG (DBKGn.DE), Goldman
Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), according to
Other issues slated for this quarter include two $3 billion
issues backed by Manor Care and La Quinta, and a $4 billion
offering backed by Harrah's, according to Credit Suisse.
"At the right leverage point and right pricing, they can
get done," Moran said. "We have to wait and see."
The single-borrower issuers may draw decent investor
interest since their top-rated portions are typically
structured with more protections against losses than "conduit"
issues with multiple loans, said Alan Todd, head of CMBS
research at JPMorgan Chase & Co.
But the market has eroded, and issuers won't experience the
same strong demand as seen in the Blackstone-Equity Office
Properties $6.9 billion CMBS last June, he said.
Until the underwriters find buyers, banks may be burdened
by CMBS, which have shown signs of weakening amid loose loan
underwriting standards and a slowing economy.
Last month, Moody's Investors Service downgraded the
ratings of Bear Stearns, citing risks in its commercial real
"Moody's particularly noted Bear's concentrated risk from
its participation in the $26 billion Hilton leveraged buyout
transaction," the report said. "This exposure is also large
relative to the firm's earnings capacity and capital position"
and suggests "elevated risk appetite."
Analysts have also cautioned about CMBS exposure at
Wachovia Corp WB.N, another top-ranked underwriter.
"CMBS-related write-downs may wipe out earnings" in the
fourth quarter, wrote Howard Mason, an analyst at Sanford C.
Bernstein & Co, on Dec. 6.
(For more M&A news and our DealZone blog, click here)
(Editing by Gerald E. McCormick)