Rick Jones

Subscribe to Rick Jones's Posts

Rialto Capital – Series 2012-LT1 is a done deal. It represents a huge innovation in commercial real estate structured finance. This is the first liquidating trust vehicle successfully securitized in the United States since the famous RTC N Series and its progeny of the mid-1990s. Briefly, the transaction involved the pooling of sub-performing, non-performing and REO assets pursuant to a plan to liquidate the assets in a measured but reasonably expeditious fashion. The sponsor holds the equity and a single class of debt was sold to investors. The deal has closed; the sponsor has stable, predictable match term financing.   Bond buyers got a transparent and robust structure with strong subordination, management and downside protection. A powerful new tool has been provided to the commercial mortgage finance industry.Continue Reading Innovation In Securitization Is Here: And It’s About Time!

For the last few weeks, I’ve been writing about investing in distressed bank assets, with a particular focus on the European markets. As you know, we think there are huge opportunities as the European banks disintermediate to meet capital thresholds, while the economy in Europe grinds slower and slower. Last week in this blog we talked about considerations on the sell side. Now, near and dear to my heart; the buy side.

First, we can start by thinking about everything said in last week’s article on the sell side and turn it over and look at it from the buy side. The asset pools will continue to be heterodox. The collateral, the loan documents, the economic terms of the loans will all be heterodox. Notwithstanding my plea to the sell side to get their house in order before pools are exposed to the marketplace, you should anticipate that pools will not be cleaned up for prime time before being exposed for sale. Files and data tapes will be incomplete and will be corrupt, documents will be missing, and underwriting information will be woefully hard to come by.

That’s what it is, get over it. We play the cards we’ve been dealt and we bid on what we got.Continue Reading The European Bank De-Risking Continued: The Buy Side

Sometimes a bank just has to sell assets. For many banks confronting capital shortfalls, this is one of those times. Last week, we wrote generally about the "Investing in Distressed Bank Assets Conference" in London. Great conference. Marquee headline: EU Banks Will Sell Risky Assets. Time for a deeper dive into issues confronted by the sellers. 

So, if you want to sell a big pile of assets (steaming or otherwise), what do you do? You can certainly hire one of the well-known brokers (er, I mean loan sale advisors) in the market and tell them to have their way with you. They will do some level of loan file organization; produce some type of tape; produce a book (pretty pictures); and set up a war room. They will run a public auction process. They will jawbone the bidders.  Do they do a really good job? Read on. Is this the only option? No.Continue Reading Time to Sell the Silver

Last week, I spoke in London at a conference, “Investing in Bank Assets” sponsored by the Association of Financial Markets in Europe (AFME). The Conference had a titillating, if a tad alarming, subtitle “The European Purge Begins”.

The question is, of course, is it true?  The purge, I mean.   Is there a European purge afoot, and are there massive opportunities to invest in European bank assets? I, for one, certainly hope so. 

Let’s test the case. Those who read this blog regularly will be aware we’ve been chirping about these opportunities for quite some time. Having participated on one side or another in most of the recent European banks’ initiatives to dispose of dollar denominated US assets, we’ve become quite fond of this nascent trend. And, not to bury the lead, we think there is a very large opportunity in the disintermediation from European banks, and a particularly large opportunity with respect to US commercial mortgage loan assets held by our European friends over the next 12 to 24 months. By the way, kudos to AFME, Gilbey Strub, Managing Director for Resolutions and Crisis Management at AFME and her colleagues for putting on a terrific show. It was co-sponsored by Dechert and by Alvarez & Marsal.Continue Reading MORE ON OPPORTUNITIES IN EU BANKLAND

We’ve been writing a lot recently about the likelihood that European banks and, to a lesser extent, U.S. banks would be strongly incented to sell assets to improve capital ratios. We had a client briefing in New York on the Eurobank crisis a few weeks ago. We brought together our North American and European regulatory and transactional counsel to cover a wide range of issues from the sale of assets to rescue capital. We had a lively conversation on the panel and with the audience about asset sales. It was pretty clear to one and all that if assets are not disintermediated, bankers will be defenestrated. Given the choice, we are pretty sure the banks will sell assets.

De-risking of banks’ balance sheets might be less than terrific macroeconomic policy at a time when economic activity is weak and could be very bad if it touches off a powerful credit contraction and a descent into a continent full of zombie banks. That’s bad. But, always look on the bright side of life, in a Life of Brian sort of way. In the short to medium run, the velocity of transactional activity around financial assets will go up. Indeed, we have been very busy since mid-year buying, selling or financing pools of loans bereft of the love of the bank who made ‘em.Continue Reading Learning to Love Disintermediation

Recently, the Wall Street Journal highlighted the arrival of “bad loan securities.” If this is a trend, and I both hope and think it is, we clearly have to get a better deal name for these than “Insert Bank Name”, Bad Loan Securities 2012-1. Securitization of less than ideal conduit product has been with us since the birth of securitization, but reached its apogee in the RTC series, for non-performing loans, in the early to mid 1990s. That transaction architecture is being revived, and it’s about time. Both Fitch and DBRS have published criteria, or at least guidance and the other agencies are beavering away, busy working with bankers to come up with workable ratings technology.Continue Reading The Return of the Liquidating Trust

It’s that time of year when we’re forced to think about budgets and business plans. The pointy headed types from the accounting department want to know exactly what we’ll be doing the second week of next May and, as I’m sure every one of you have said (or thought) when confronted with such bureaucratic insanity: If I knew exactly what I’d be doing and what the business environment would look like next year, I would (A) not tell you, and (B) stop doing this. But with that said, and notwithstanding my crystal ball is as opaque as the bottom of a Stygian cave, we need to plan.

So, I’ve been thinking. What the heck are we going to do next year? Is the CMBS market irrevocably broken? Was Credit Suisse trigger happy or prescient, stepping away from the market? Will investors buy bonds? Will European banks sell assets like it is the last hour of a bake sale? How about the US banks? Will banks make loans? Will we pare down the list of eager CMBS lenders to 10? Will the life companies replicate their boisterous 2010-2011? Will we finally see the bubble of refinancing we have been predicting to occur in two years for the past five, actually happen in 2012?    Will investors commit enough money to the high yield sector and will the mezzanine market really be hot? Will we ever do a covered bond? Will we ever do a CRE CDO (like I’ve been prattling along about for quite a while now)?   Live in hope; die in despair, as my daddy-in-law used to say. Will real estate people actually build new stuff and launch new projects? Do you think China would lend us a construction crane or two just for a while? Will risk retention arrive? Reg AB 2.0? What about the Volcker Rule? Will the rating agencies continue to conduct business as usual? What will the elections bring? Will the Greeks sell the Parthenon? Will the Italians sell the Tower of Pisa? Will haughty France play the poodle to Mrs. Merkel? What ultimately about Germany? Will the Europeans continue to support their champion national banks while they compete for a starring role in the next Night of the Living Dead movie? Forever?Continue Reading THE NEW NORMAL / A THEORY OF GOOD NEWS: 2012

While Europe is sorting through Dexia’s assets, it is worth exploring Dexia’s fall in light of Basel III. As mentioned here previously, Dexia had been reporting Tier I capital of roughly 10%. Well done! That would clearly meet the proposed capital requirements to be phased in over the next year. So what went wrong?

Dexia had pursued a strategy of aiming to be the largest player in municipal financing. It owned gobs of sovereign debt. Down-grades and write-downs of that sovereign debt have now left Dexia well short of its Tier I capital requirements (to the tune of 1.7 billion Euros).

This is hardly a man bites dog story. The Gnomes of Basel, and pretty much everyone else, misjudged the perceived credit risks of sovereign debt. Basel I (and, to be honest, II and III) encouraged the holding of sovereign debt by assigning the lowest risk-weight to such assets, meaning a reduced capital requirement. So, the banks bulked up and then: Off the cliff we all go! Is there still a warm glow of knowing one had met international norms?Continue Reading Dexia / Soros – Basel III and the Importance of Faith

Senators Kaye Hagan and Bob Corker’s co-sponsorship of Chuck Schumer and Mike Crappo (who says we all can’t get along) filed “The United States Covered Bond Act of 2011.” I almost think this bill gets support because no one can figure out a compelling reason to be for or against it, so why not show a little whiff of bi-partisanship? The new bill broadly tracks the bill that Congressman Garrett introduced into the House earlier this year, HR-940. We’ve written about this before (it is getting to be quite a list, see here, here, here, here, here, here, here, here, here, here and even as a Golden Turkey), and, I gotta say, my views have not materially changed. This remains an answer to a question no one has. Please, someone, tell me why this is important and useful!? Continue Reading Covered Bonds Redux

With Thanksgiving approaching and the holiday season in full swing, we here at Crunched Credit would like to present our annual “Golden Turkeys”.

The Golden Turkey for the Most Confounding Regulation: The Premium Capture Reserve Account

Back in March, the credit risk retention NPR was released. Perhaps the most unexpected (and unwelcomed) part of the rule was the Premium Capture Cash Reserve Account (PCCRA).  The PCCRA provisions actually say that issuers may not profit from securitizations or recoup costs up front. The NPR says that a securitizer who monetizes either an IO or earns a premium on the sale of P&I bonds has to put that money aside to serve as a first loss reserve for any losses on the mortgage loans for the life of the deal–on top of the 5% risk retention requirement. Neither a PCCRA nor a reasonable facsimile thereof was contemplated in the Dodd-Frank Act. Needless to say, PCCRA has generally not gone over very well: Confound it!!

The Golden Turkey for the Best Self-Inflicted Wound: The “Bad Boys”

And by “bad boys”, we mean those who have violated the “bad boy” recourse carve-outs in their loan documents. Although most commercial real estate loans are non-recourse (i.e. the lender can only look to the value of the property securing the loan to settle the borrower’s obligations if there is a default under the loan), most contain certain “bad boy” carve-outs (for example, the borrower filing for bankruptcy or misappropriating funds) from the non-recourse nature of the loan, permitting the lender, in certain circumstances, to look to the borrower (as well as the guarantor) to satisfy the borrower’s obligations. Some borrowers, victims of the great recession, have opted to file for bankruptcy in an attempt to stop the bleeding and dam the "bad boys". Oops. Lenders confronted by misbehaving borrowers have enforced the “bad boy” provisions, and, shockingly, the lenders have been successful! The New York Supreme Court has, on 2 separate occasions in March and July, upheld the “bad boy” provisions. While putting the borrower into bankruptcy may seem like a good solution, if doing so will violate the “bad boy” recourse provisions, it will make a bad situation worse.Continue Reading COMMERCIAL REAL ESTATE 2011 RECAP: AND THE (ANNUAL) GOLDEN TURKEY AWARD GOES TO….