Monday, August 3, 2009

CMBS balloon risk looming

A number of readers have asked about the "commercial mortgage maturity wall", the maturity profile of commercial real estate loans securitized with CMBS - alternatively called CMBS refinancing risk or "CMBS Balloon Risk". Note that this excludes commercial loans that haven't been securitized. Here is the latest chart:

"With ext" are those loans that can be extended one or several times. "ARD" stands for "anticipated repayment date" loan. Unlike a typical balloon commercial mortgage, not repaying the balance on ARD does not constitute an event of default. Instead the borrower is forced into a higher rate and high principal paydowns to accelerate amortization.

The rest are standard balloon loans. At maturity you have two choices: refinance or sell the property. Neither works in this environment. And TALF won't be around when the loans mature. This chart alone is an indication of serious troubles for commercial real estate in the near future. So don't launch your distressed real estate fund just yet - wait a couple of years.

Also some readers have asked for a CMBS primer. The document below from Nomura is a good overview of CMBS and synthetic CMBS.

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