Monday’s Numbers: March 25, 2013

Are We Looking at Sunrise or Sunset?

A recent Wall Street Journal article entitled “Lenders Are Warned on Risk” described concerns, expressed by the Federal Reserve and other financial regulators, regarding potential bubbles in areas of the financial markets. Specifically, the Fed et al noted a potential deterioration in financial controls and underwriting quality for loans used to finance management buyouts, mergers and acquisitions, capital investment, and the like.

As investors continue to scour the financial markets for higher yielding investments, the financial markets continue to scour their clients for those that need capital and can pay a premium for it. According to S&P Capital IQ LCD, $78 billion of leveraged loans—a record—were sold in February 2013; the prior record was $71 billion in loans issued in February 2007.

In addition to concerns about the application of underwriting standards and quality during the loan origination process, regulators are concerned about the impact of a financial crisis of any sort on lender’s balance sheets. Given the recent turmoil the financial markets have undergone, it seems certain the prices of these loans could decline significantly if we face another period when investors want only the most liquid and credit-worthy investments, i.e., sovereign debt and most likely, U.S. government sovereign debt.

Another concern: what will be the impact on the value of existing loans held by investors such as pension funds, asset managers and the like in their portfolios? If the crisis is worth its salt, interest rates will increase and values of existing debt securities will decline; liquidity will dry up, defaults will increase… not too pretty a picture.

What can we do to blunt the potential for another sunset in the capital markets? Not much except hope that the regulators guidance has the necessary impact on lender’s behavior.

Why Is Real Estate Investment So Popular?

It’s a relative value thing. Just look at the chart which follows which compares private real estate property returns for the fourth quarter 2012and the trailing 12-months ended December 2012 to a wide array of investment alternatives.

And so long as real estate returns provide a premium over alternatives, real estate will remain a favored investment category.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads decreasing up to 5 basis points. All-in cost for 10-year paper with low loan-to-value ratios remains at sub-four percent levels as the debt market looks to be flourishing. Competition among lenders remains strong as conduits continue to win deals from conventional lenders such as commercial banks and insurance companies.

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial real estate mortgage spreads for the period ending March 5, 2013 showed spreads for 10-year, fixed rate mortgages, basically unchanged as compared to the prior survey period ending February 4^th.

Liquidity, whether sourced privately from commercial banks and insurance companies, or publicly via the CMBS market, remains abundant and priced aggressively as lenders compete for business.

Year-to-Date Public Equity Capital Markets

DJIA ⁽¹⁾: +10.74%
S&P 500 ^(2): +9.16%
NASDAQ ⁽³⁾: +7.47%
Russell 2000 ⁽⁴⁾11.41%
Morgan Stanley U.S. REIT ⁽⁵⁾:+5.92%

^{(1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index. (4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.}