The Financial Accounting Standards Board has taken an action that has resulted in a flood of commercial mortgage bond issuance.
Almost $10 billion of the bonds have been sold so far this month, a figure to be augmented this week, when Lehman Brothers sells a planned $2.1 billion package.
The deal will consist of $1.3 billion of bonds backed by floating- rate loans and $800 million with UBS Warburg LLC backed by a loan on nine shopping malls owned by Westfield America Trust.
Industry insiders are saying that the rush to CMBS issuance–making July by far the busiest month this year–is being propelled by relief over a July 18 FASB action significantly modifying statement FAS 140, a rule many feared would have greatly limited the ability of banks and other financial institutions to securitize and service mortgages.
The concern, alleviated by the recent FASB ruling, revolved around the tests devised by the standards-setting body to determine whether or not securitized assets can be isolated.
This was particularly critical for banks covered by Federal Deposit Insurance Corp. legislation, which overrides Chapter 11 in determining which assets can be seized in a bankruptcy situation.
The ability to “isolate” assets is critical to any securitization. Click here to read a related article on the topic.
The new ruling has largely eliminated the concerns of the banking industry, particularly parts of it that let banks off the hook by “making explicit” the conditions under which their position in relation to transferred assets “do not constitute continued involvement,” says Art Frank, director of mortgage analysis at Nomura Securities International.
The new FASB ruling “will allow CMBS issuance to go forward,” he says.
The rally, which has been greatly influenced by Federal Reserve Chairman Alan Greenspan’s bleak economic updates to Congress over the past two weeks, shows no signs of abating at this point, especially given that the next Federal Open Market Committee meeting is still weeks away.
This fact apparently has not escaped the notice of many issuers.
Nearly $17 billion of regular corporate debt, mostly investment grade, was sold last week, a level of new supply injection not seen since earlier this year. Click here for details.
Who’s Entering the Market
Looking ahead, a few firms have surfaced over the past week with confirmed plans to issue in the near future:
In investment grade, Pulte Homes is planning to privately sell $300 million of 10-year notes via Salomon Smith Barney.
The Bloomfield Hills, Mich. homebuilder’s existing debt is rated Baa3 by Moody’s Investors Service and triple-B by Standard & Poor’s. The proceeds will be used to finance the firm’s acquisition of Del Webb Corp., a developer of retirement homes.
New names in junk include Rockwood Specialties Group, a unit of buyout firm Kohlberg Kravis Roberts & Co., which is planning to sell $295 million, Louisiana-Pacific Corp., a building materials firm, which plans $200 million of (BB-/BBB-) senior subordinated notes to refinance existing debt, Stoneridge, a maker of electrical parts for cars, with $200 million of 10-year senior subordinated (B3/B) notes, and Acetex Corp., which is readying $190 million of eight-year senior subordinated (B2/B+) notes.