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Among the most followed business stories of last week was the humbling admission from Apple that the iPhone 4g included a “totally wrong” formula for calculating the number of “reception bars”. Apparently the phone works, just not if you’re holding it (something now known as the “grip of death”). The immediate, virulent, nerdy but surprisingly sophisticated response by iPhone consumers to the glitch – a youtube search reflects more than 400,000 videos posted about the three-week old product – is reflective of the enormous importance of wireless computing in our culture. Blackberrys, palms, iPads, iPhones, smartphones and netbooks are critical business tools for millions – and, as anyone that’s ever lost their Blackberry signal during a conference call can tell you – users’ expectations are for information access that is cheap, consistent and unlimited.

In the real estate market, this demand is manifesting itself through continued growth of data centers as a stable asset class for real estate developers, investors and lenders. Data centers are facilities used to house computer systems, servers and components. My IT guy tells me it’s where the internet is actually located (sort of). Design necessities – including HVAC, fire suppression, security systems and (especially) power supply considerations – drive exceptionally high construction costs. Environmental concerns among image-conscious corporate tenants are driving builders to produce “green data centers” (i.e. low carbon, energy efficient) – one of the fastest growing sectors in this niche. But with reports of demand outpacing supply by 3-4 times, these properties are being built – and that requires capital.Continue Reading Demand Drives Data Center Growth

The push for covered bond legislation – left on the cutting room floor when Fin Reg. was finalized during a marathon session last week (or should I say finalized subject to Senator Scott Brown’s continuing review) – is coming under renewed discussion by Congress (led by Representative Scott Garret) and the FDIC.

The FDIC balked at the proposal that was to be included in the Dodd-Frank bill because of concerns about the effect of certain collateralization requirements on failed banks’ balance-sheets. Covered bond terms can require issuers to replace weakening collateral upon the occurrence of certain triggers; in a receivership scenario, this re-collateralization requirement would force the FDIC to re-deploy quality assets to serve as bond collateral and shift the risk of loss of declining collateral from bondholders to the government. The FDIC hates when that happens.Continue Reading FDIC and Congress Renew Covered Bonds Discussion

Dechert has assembled a team to cover the latest legislative and regulatory developments affecting the CMBS, RMBS, and ABS markets. Each Dechert Securitization Update provides timely information on these developments. For a discussion of several recent legislative and regulatory developments that will shape the future of the securitization markets, please see the latest Securitization Update…

Community banks – long touted as the “next domino to fall” during this late unpleasantness – were expected to be a significant source of distressed assets for savvy investors.  However, many are finding the FDIC Structured Loan Sale Program a long and bumpy road for investment.

Historically, the FDIC operated to separate the wheat (failed banks’ desirable, high-quality assets (i.e. depository bases)) from the chaff (the bad – sometimes very, very bad – loan assets that caused the failure in the first place).  Two decades ago, The Resolution Trust Corporation (RTC) found homes for over $400 billion of assets during the savings-and-loan crisis. This time around, however, the FDIC – holding in excess of $600 billion in distressed assets seized from failed banks – is steering away from outright bad asset sales to thresh out the chaff, opting instead for a policy designed to force would be bank buyers to take the bad with the good.Continue Reading FDIC Loan Sale Program: Lending at the 19th Hole

Notwithstanding our optimism, it appears that there was not enough support from the Senate side of the reconciliation committee to include the proposed covered bond amendment in the final financial reform bill approved by the reconciliation committee.  However, the support received by the House and some members of the Senate committee indicates that covered…

Earlier this week, Representative Scott Garrett (R-NJ) introduced an amendment to the proposed financial reform legislation that will establish a regulatory framework for a covered bond market in the United States.  The House side of the reconciliation committee quickly passed the measure – the Senate side is now considering it.  This development is welcomed news to a banking industry that has craved a covered bond market for some time now.  For our part, we’ve been examining covered bond structures since the advent of the credit crises as our clients continued to try to devise a workable structure, so we’re very excited by this development. 

Covered bonds, which have been part of the European financing vernacular for over 200 years, function as a cross between an unsecured corporate bond and an asset-backed security.  Typically, a financial institution will issue a direct-recourse bond which is also secured by a specified pool of assets that remain on the financial institution’s balance sheet.  These are attractive to investors for many reasons, most important of which is that the investor has recourse to a specified pool of assets in the event the financial institution becomes insolvent, unlike typical unsecured corporate bonds that depend solely on the issuer’s credit.Continue Reading Reconciliation Update: Covered Bonds

The Senate reconvened reconciliation hearings at noon today with a deal brokered yesterday to place the new financial watchdog agency within the auspices of the Federal Reserve, rather than establishing an independent agency.  This compromise by Congressional Democrats – which is engendering strong opposition from some important constituencies – could indicate a growing desperation to get something (anything, anything at all) in front of the President before his appearance at the G-20 this weekend.  As someone who spends a good piece of my week (and some weekends) reading and writing documents that are intended to build a legal framework around unforeseeable real-word events, I can appreciate the utter impossibility of crafting legislation that will simply get it right the first time.  I’ve learned this too many times:  As complexities increase, the better can become the enemy of the good. Continue Reading Dodd’s Inferno

According to the Boston Globe, the owners of Boston’s signature office building – the John Hancock Tower – have begun marketing a significant stake in the building.  Many will remember that the Hancock Tower represented one of the Great Recession’s first large-scale mezzanine foreclosures, falling in late 2008/early 2009 when a joint venture comprised of Normandy Real Estate and Five Mile Capital acquired the building via mezzanine foreclosure.  As other industry players were “extending and pretending”, the team from Normandy/Five Mile did their homework, called the borrower’s bluff and bought themselves a building.  And now it looks like it may be paying off.

By accurately predicting the building’s value and strategically purchasing mezzanine debt at the rights levels, the joint venture was able to seize control of the mezzanine stack and force foreclosure.  The master stroke – using mezzanine controlling holder rights to de-lever a bloated (and hugely complicated) mezzanine capital stack, while keeping attractively low-priced mortgage debt in place – serves as a brilliant example of sophisticated distressed-debt investing in CMBS structures and a primer on how to fight and win “Tranche Warfare”.
 Continue Reading The Hancock Tower: A Distressed Debt Success Story?