I think I will recap this week in BoomBustBlog postings early since a comment from the British sell side bank Barclay's literally irked the shit out of me. First the comment, then the recap. In my post yesterday, "Does Anyone See This Emergency As An Emergency, Or Is A Half Trillion Euro Pay Day Loan Bullish?", I inquire as to whether the Barclay's strategist weed is actually stronger than ours.

... headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to heart, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks?

Now, to answer that question, let's jump to a post earlier in the week introducing my interview regarding Greece on RT's Capital Account, Why Greece Bailout Games Will Cause The Rest of the EU to Break Out the Grease…

... If you didn't have a job, you wouldn't be able to pay back your loans. Then again, one way to solve this problem is simply not to give anybody a loan, eh?

Greece_Bank_Lending_To_Households

Alas, we don't have to worry about that since the money spigots are just so turned on to the Greek corporate sector you don't have to worry about a scarcity of jobs. With all of that capital sloshing around the system, Grecian companies are bound to start going on a hiring binge ANY MINUTE NOW!

 Greece_Bank_Lending_to_Corporates

Now, look very carefully at the last two charts, take a big toke, and re-read what that Barclays Bloke had the nerve to speak in a major business rag... 

 ...it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Damn.... Okay, maybe we are taking this guy out of context. After all, he also said, "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money". Hmmm, let's take a look at some of the smaller banks, wait a minute... Aren't the Greek banks relatively small???

Then there's the issue of the run on the banks. With all that is going on, I made very clear that multiple runs are imminent, hence the need for 100 bp, junk collateral funding from the ECB. The Barclay's bloke says differently in that the money will not go to cushion runs, but will go to the greater [sic real] economy. Yeah... Pass the blunt! As excerpted from the following reports...

file iconBNP Exposures - Professional Subscriber Download Version

 


image014_copy

I have explored European bank runs in depth, see The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

 

Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).

image015

 

The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties - who actually want to see cash! 

Overnight and on demand funding is at a 72% deficit to liquid assets that can be used to fund said liabilities. This means anything or anyone who can spook these funding sources can literally collapse this bank overnight. In the case of Bear Stearns, it was over the weekend.

In reviewing my post on this topic in January predicting the fall of Bear - "Is this the Breaking of the Bear?", it is actually scary how prescient it actually was...

image018.gif

Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, I can say that when I do watch it I hear a lot of perma-bulls stating that this and that stock is cheap because it is trading at or below its book value. They then go on to quote the historical significance of this event, yada, yada, yada. This is then picked up by a bunch of other individual investors, media pundits and other “professionals,” and it appears that rampant buying ensues. I don’t know how much of it is momentum trading versus actual investors really believing they are buying on the fundamentals, but the buying pressure is certainly there. They then lose their money as the stock they thought was cheap, actually gets a lot cheaper, bringing their investment down the crapper with it. What happened in this scenario? These investors bought accounting numbers instead of true economic book value. Anything outside of simple widget manufacturers are bound to have some twists and turns to ascertain actual book value, actual marketable book value that is. This is what the investor is interested in, the ECONOMIC market value of book, not what the accounting ledger says. After all, you are paying economic dollars to buy this book value in the market, so you want to be able to ascertain marketable book value, I hope it sounds simplistic, because the premise behind it is quite simple – How much is this stuff really worth?. The implementation may be a different matter, though. I set out to ascertain the true book value of Bear Stearns, and the following is the path that I took...

I urge all to review that post of January 2008 and realize that negative equity is negative equity, and no matter how you want to label it, account for it, or delay and pray, broke is broke! This lesson should not be lost on the Europeans, but unfortunately, it is!

image012

 So, is this just theory, or do I have a point? Well, I had a point when I applied the theory to Bear Steans in 1/08, three months before they collapsed. It also seemed to work as I warned about the collapse of the Greek banks in 2010, see How Greece Killed Its Own Banks! and the subscription-only File Icon Greek Banking Fundamental Tear Sheet. Was I right regarding large equity drawdowns causing masiive bank runs? Well in "So, Can Europe Nationalize All Of Its Troubled Banks? Place Your Bets Here" I quoted an article from ZH:

 Greek Bank Deposit Outflows Soar In January, Third Largest Ever

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

image035 

image036

image038

So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

image040 

image045

 My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Stay tuned!

Published in BoomBustBlog

In a discussion that I had over at ZeroHedge there came the topic of whether bank runs are possible in Europe. Well, I believe we've already had some devastating one's (ex. Northern Rock) but if one takes the continent only or the EZ in particular, we still have a significant systemic threat. The gist behind the argument is that if the true economic capital is weakened to the point that depositors/creditors/counterparties make a run for it, the sovereign nation in which it is domiciled will simply nationalize it. Hmmm... Let's take a look at how that might work out, as excerpted from Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

image015.png

 

Imagine the Swiss nationalizing just UBS and Credit Suisse, whose assets constitute 500% of the Swiss GDP. THAT'S JUST TWO BANKS!!! Imagine if the entire banking system got into trouble from daisy chaining European defaults??? 

This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

image009.png

If BoomBustBloggers remember, I went on a tear with my theory of European bank runs last summer. Reference:

I strongly suggest that any interested in the topic peruse the links above if they haven't already done so. They drive the point home. And on the topic of Greece and bank runs, ZH runs Greek Bank Deposit Outflows Soar In January, Third Largest Ever

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.

 

Were the big Greek banks effectively nationalized already? Don't the depositors and counterparties/creditors know that Bank of Greece and the ECB have their backs. I mean, come on now. Paranoia is simply going too far. MG Global account holders may be getting some of their monies back, as is somebody who had an account somewhere in Lehman. I remember when I made this warning about Bear Stearns back in January of 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies). Nobody wanted to listen: Is this the Breaking of the Bear?

 

Once again, do I have a crystal ball??? Or just a spreadsheet??? After all, the ECB just injected a record amount of junk collateral backed, near ZIRP liquidity into the European banking system - Helicopter Ben style - a half trillion Euro worth, or 3/4 trillion dollars or so. And to think, many believe Hip Hop music and iPhones to be one of the biggest US exports:-) Of course, everybody on the sell side sees this as bullish - reference Cascade is to Domino as Greece is to Por… and Does Anyone See This Emergency As An Eme… for a more common sense approach to this ECB bailout of bailouts. As for just why such a massive liquidity injection was necessary? Well, as this excerpt from the subscriber edition of the BNP Paribas report is marked...

 

image014_copy

 

image017_copy

'Nuff said! Subscribers, as (not if, but as) this breaks, these are the companies trading at the valuations that are most shortable/profitable in my opinion...

US CRE

European Insurance

Published in BoomBustBlog

Today's big headline from Bloomberg: Euro-Area Banks Tap ECB for Record Amount of Three-Year Cash

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to hear, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks? Is the "pass[ing] it on the the economy" the reason why there is now so much liquidity in European CRE? Here's a quick reminder of where I stand on this...

So, it's safe to say that all of those European REITs and real estate concerns with property mortgages coming up for renewal while underwater will definitively see most of that LTRO 2 money, right? Let's all take a deep breath and hold it as we wait for that one to happen. Ready? One... Two... Three...

What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21Slide21Slide21Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

 

Reggie Middleton Featured in Property EU, one of Europes leading real estate publicatios

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Published in BoomBustBlog

Foreclosures_highway_exitI have just posted "Scenario III : Sale of properties to fund debt repayment" for the latest forensic analysis REIT subject - Fire Sale Scenario Analysis. As stated in previous posts, this company is virtually a guaranteed bankruptcy. This piece is available to all paying subscribers. I urge all subscribers to download and review:

Recapitalization and individual property analysis will be posted within the next few days. With those research postings, I feel I've covered every practical angle this company could take to kick the can down the road and the resultant findings are the exact same as they were before the analysis - bankruptcy, or a simulacrum of such, is unavoidable!

The “fire sale” or distressed asset disposition scenario seems like the least possible, least likely and the least practical scenario. The reason is that the Company’s portfolio has either properties (1) which have negative valuation after considering debt due on them or (2) have properties that don’t have specific debt against them but are mortgaged under the revolving credit facility.

Please see the details on valuation of 27 properties we have valued in the aforelinked document. As illustrated, almost all properties with a positive valuation (see Column L) lack property-specific debt against them. But all of these properties have been encumbered under the revolving credit facility. The properties not covered under the revolving credit facility and having positive valuation after deduction of debt due on them are as listed in the analysis. The total positive value of these three properties is around USD 36 mn which is insufficient to meet net refinancing requirement of USD 295 mn as detailed in the document. Again, a hard landing is absolutely unavoidable at this point.

This will not be the only real estate company to meet such a fate, and I have made it very clear in many a past post, TV interview and presentation.

Reggie Middleton on CNBC's Fast Money Discussing Hopium in Real Estate

Reggie Middleton discusses the fall of commercial real estate in the US

  1. The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!
  2. The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  3. Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

Previous related posts on this company...

Watch The Evidence Of Global Real Estate Travails Mount As Subscribers Short This Stock

I Present To You The First Probable US Commercial Real Estate Insolvency Of Many To Come

The Real Estate Recession/Depression is Here, Eurocalypse StyleAn Overview of a US REIT Headed Towards Distress

The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!

Prepare For CRE Crash And Burn Marks At A Shopping Mall Near You

Published in BoomBustBlog

Continuing my predictive analysis of a global real estate relapse, I bring you today's headlines followed by updated research of company that we see slated for probable bankruptcy. Professional and institutional subscribers should download the latest deliverable, which illustrates the likelihood of a bankruptcy in our most recent forensic analysis candidate if it were to go the foreclosure route -Foreclosure Scenario Analysis. This is the professional addendum to the general subscriber analysis released in the post I Present To You The First Probable US Commercial Real Estate Insolvency Of Many To Come. The next deliverable will outline distressed sales of properties, and after that I will make available valuation models on 27 properties in the company's portfolio to inequivocably demonstrate that this company has nowhere to go but down. Ain't math something else? Now on to the news of (yester)day, as reported by Bloomberg. 

BofA Plaza Goes for $235M in Auction

thumb_Reggie_Middleton_on_Street_Signs_FireReggie Middleton Sets CNBC on F.I.R.E.!!! - Reggie Middleton preaching the travails of commercial real estate in 2012/13 on CNBCBank of America Plaza, the tallest tower in the U.S. Southeast, was sold at a public auction today on the steps of the Fulton County Courthouse after landlord BentleyForbes missed mortgage payments.

The noteholder had a winning bid of $235 million, according to attorney Howard Walker of McGuire Woods LLP, who ran the auction. Holders of commercial mortgage bonds took ownership through a “credit bid” placed by LNR Partners, David Levin said in an e-mailed statement. Levin is vice chairman of Miami Beach, Florida-based LNR Property LLC, the parent company of LNR Partners, the tower’s special servicer.

BentleyForbes, based in Los Angeles, paid $436 million to acquire the 55-story Atlanta skyscraper in 2006 from Bank of America Corp. (BAC) and Cousins Properties Inc. (CUZ) in the city’s biggest property deal. Since the property market peaked a year after the purchase, the 1.25 million-square-foot (116,000-square-meter) building’s value has tumbled with tenants, including namesake Bank of America, reducing space.

Atlanta has the highest rate of late payments for loans on offices bundled into bonds among the largest U.S. metropolitan areas, at 25.3 percent, according to data compiled by Bloomberg. That’s an increase from 10.4 percent a year ago and is more than triple the 7 percent national rate.

The $363 million Bank of America Plaza loan became delinquent in December after BentleyForbes stopped making payments. The loan was partly packaged inside JPMCC 2006-LDP9, which was downgraded by Fitch Ratings in December because of expected losses. 

As I've been warning in many of my previous posts, ie. (must reads if you have not already done so):

  1. I Present To You The First Probable US Commercial Real Estate Insolvency Of Many To Come
  2. The Real Estate Recession/Depression is Here, Eurocalypse Style
  3. An Overview of a US REIT Headed Towards Distress
  4. The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!
  5. Prepare For CRE Crash And Burn Marks At A Shopping Mall Near You

The can kicking of the last 3 years will come to a head once those 5 year debt instruments issued in 2007 come due in 2012 and 2013. Do banks roll over what is an obviously losing proposition or do they take the money and run. Here is an excerpt of the professional/institutional subscriber document Foreclosure Scenario Analysis showing what happens when you get to the end of the road in the neighborhood Can-Kick! Click to enlarge...

 thumb_REIT_bankruptcy_candidate_copy

We have culled the portfolio of nearly 30 properties which we individually valued and found who was due for mortgage/loan maturity in the next year. It didn't look pretty...

REIT_bankruptcy_candidate1 

 

 Of course, this is not just an "American" thing. The CRE crush will be felt word-wide, particularly in the EU, UK, and China.

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overseas, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has littel effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

 

 

 

 

 

Published in BoomBustBlog
Wednesday, 08 February 2012 07:29

The Swiss Real Estate Bubble?!

I recieved this email from a reader and thought I would toss it out to the community for comment...

Hi Reggie,

I'm curious to know your thoughts on the Swiss Real Estate Market and current bubble occurring (as the disparity between income growth and rental growth continues to widen for commercial and residential property).

Residential is protected by the Lex-Koller law, meaning that (with the exception of a few mountian resort towns) foreigner cannot buy and own residential real estate. However, commercial RE is open to foreign investment.

This growth in income vs. rent disparity has continued for quite some time and I'm curious to hear your thoughts on why you think Switzerland's economic environment has been able to sustain a bubble like this for so  long compared to other bubbles in other countries.

It has come to my attention that rents in the prime areas of Geneva and Zurich are just now beginning to trend downward (despite what Wuest & Partner, Colliers and the lot of them publish in their reports).

However there has also been an interesting "flight to quality", as I like to call it, by various REITs caused by EU fears. Yields (on NOI) in downtown Geneva and Zurich are between 3% and 4% at the moment.

Foreign govt pressure on banking secrecy is causing banks to leave, but trading companies are flowing into Switzerland to take advantage of 0% capital gains on shares.

I find it interesting to look at Switzerland because when economic indicators signal the nearing of a CRE bubble burst, other economic factors suggest such a burst might be unlikely to happen.

I'd love to read your thoughts on this apparent economic anomaly of a country.

Published in BoomBustBlog

VPRO_Rating_agency_documentary_billboard

In continuing with my rant against the ratings agencies (see Interesting Documentary on the Power of the Agencies) I bring you additional evidence that their seemingly incompetent behavior leading up to the 2008 market crash is nothing compared to what is going on today... And many think the agencies have reformed!!! Subscribers, a B-L-O-C-K-B-U-S-T-E-R forensic report update based upon the banking situation described herein is currently in the works and will probably follow this post (tomorrow). Stay tuned, for I found a company that is trading at roughly 10x its intrinsic value, and that's putting it conservatively. I will release the research on this company to lenders and then the public a few weeks after I have released the details to subscribers, so be sure to download and absorb as much information as you can. As you read the following, keep in mind how many warnings you've heard from the rating agencies about those real estate concerns...

As reported this morning by FT.com:

Eurozone crisis triggers credit squeeze

The eurozone debt crisis has triggered a severe credit squeeze across the region with banks imposing significantly harsher loan terms and demand for credit tumbling, a European Central Bank survey has shown. Banks’ weakened finances and worries about the eurozone’s future led to an aggressive tightening of credit standards faced by businesses and households at the end of last year and early 2012. Demand for mortgages and loans to fund corporate investment also fell sharply, the survey showed. 

I have been warning of this since very early 2010, to wit:

Overbanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe March 2010

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

image015.png

 

I also warned about a year later in Is Another Banking Crisis Inevitable? 04 February 2011

and even last month in...

The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History Monday, 19 December 2011

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overseas, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has littel effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21Slide21Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

Do you really think they will rollover the US debt anyway? How about the result  of the guaranteed losses that both bank and investor will take as said debt either fails to get rolled over or is forced to do equity cramdowns? Then think about EU banks going down and American banks being called to pay CDS!

Okay, back to the FT.com excerpts...

Germany, however, remained immune.

Do you remember when I warned about GroupThink creating lopsided risks in the market? Reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

The results suggested December’s unprecedented injection into the financial system by the ECB of €489bn in cheap three-year loans had failed to prevent a retrenchment by banks that could hamper the region’s economic recovery. The effects of the central bank’s actions are still feeding through, however, and the ECB will be relieved that the tightening of credit conditions is not yet as severe as after the collapse of Lehman Brothers investment bank in September 2008.

Well, that' because a European bank hasn't collapsed yet. It's not as if they haven't tried, though.

Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!...

Below is a chart excerpted from our most recent work showing the asset/liability funding mismatch of a bank detailed within the report. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation after both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM!

Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).

image015

The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties - who actually want to see cash!

image012

Using this European bank as a proxy for Bear Stearns in January of 2008, the tall stalk represents the liabilities behind Bear's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk displayed in the first chart in this missive, and that is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style"...

And back to the FT excerpts again...

The ECB’s bank lending survey - conducted between December 19 and January 9 - followed Friday’s weak December lending data that showed the sharpest monthly fall in outstanding corporate loans since records started in 2003. The ECB said participants had “explained the surge in the net tightening of credit standards by the adverse combination of a weakening economic outlook and the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position”.

It added: “The prevalence of tightening appeared to be widespread across larger euro area countries, with the notable exception of Germany.”

... For mortgage loans to households, the balance reporting a tightening of credit standards rose from 18 per cent to 29 per cent – the highest since January 2009. Demand for mortgages slipped further, with the balance reporting a decline over those reporting increases rising from 24 per cent to 27 per cent.

Hmmmm! Mortgages? Methinks Reggie's admonitions on European CRE has come to pass, eh? Also from The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History Monday, 19 December 2011

Then think about those sovereign states that truly cannot afford to bail out their banks.

image009.png 

 Click the following pages to englarge...

PEU11-MA04-012-INGACADEMY-v2_Page_1

PEU11-MA04-012-INGACADEMY-v2_Page_2

PEU11-MA04-012-INGACADEMY-v2_Page_3

 Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

I have actually discussed the Dutch market in depth at the ING conference...

Keynote presentation

Yes, "The Real Estate Recession/Depression is Here, Eurocalypse Style". We have already identified a Dutch real estate short candidate - subscribers (click here to subscribe), please download Northern Europe CRE short candidate #1. This company is suffering from a variety of maladies that, on an individual basis, may not seem that bad but once aggregated put it on the same path that GGP was on. The difference? This is after the so-called economic recovery, in the conservative EU state of the Netherlands, and right before the massive rate storm that will bethe Pan-European Sovereign Debt Crisis that I have warned about since 2009. The result, many properties that will either be difficult or impossible to refinance or roll over. Again, subscribers, reference Dutch REIT Debt Analysis, Blog Subscriber Edition. This is a succinct illustration of how this company will not be able to rollover much of its debt, and the absolute lack of recognition of such by the markets. Of interest is the fact that the number 3 short candidate on our short list is over 50% owned by this company  (which came in as #!). With friends such as that, who needs enemies!

Q&A and discussion, part 1

Q&A and discussion, part 2

As usual, I can be reached via the following (or directly via email), and urge all who rely on the perennially wrong sell side to subscribe to BoomBustBlog:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube
Published in BoomBustBlog

In this post I will present to BoomBustBlog subscribers evidence of the next GGP. For those who don't know the GGP story, it was the nation's 2nd largest

Timely Subscriber Material

All paying BoomBustBlog subscribers are prompted to download the Sample Property Valuation document which highlghts the dramatic discrepancies between actual cash flow valuations and the valuation that our subject company is carrying its portfolio inventory at. This document must be read in conjunction with the Cashflows and Debt Preliminary Analysis in order to get a fuller picture. Extensive portfolio analysis and online valuation models will be available to professional and institutional BoomBustBlog subscribers in order to assist in calculating timing and severity in regards to insolvency.

mall REIT whom I went short on in 11/07 while it had:

  • an investment grade rating (What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog?),
  • buy recommendations from all the major investment banks that covered it (Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?),
  • a CFO issuing nonsense press releases contradicting my research (BoomBustBlog.com's answer to GGP's latest press release). This press release and my response to it outlines a situation that is eerily similar to that of the subject company that I'm presenting to my subscriberstoday, to wit:
    • We analyzed GGP's financial position and its expected funds from operations (FFO) to check the company's ability to meet its debt obligations -

      With GGP's optimistic assumptions of a cap rate of 7.5% and NOI of $365 mn and $415 mn for 2008 and 2009, respectively, (based on its historical growth rate of 5%) valuation for GGP's specific properties (on which debt is due for repayment in 2008 and 2009) comes to around $4.9 bn and $5.5 bn for 2008 and 2009, respectively. Based on LTV of 50% (which looks quite reasonable amid the current turbulence in the global credit markets) GGP should be able to raise $2.4 bn and $2.8 bn in 2008 and 2009, respectively. However, GGP's debt due for repayment in 2008 and 2009, respectively, is approximately $2.6 bn and $3.3 bn, translating into respective short-falls of about $188 mn and $577 mn (as shown below), even under the over-optimistic case presented by the company. Surprisingly, the company's financing requirement (as included in its press release) totally ignores the funding requirement for capital improvement and redevelopment programs required for sustained and long-term growth.

      $ million GGP's Assumptions Reggie's Assumptions      
        2008 2009 2008 2009      
      Property specific NOI $365 $415 $244 $369      
      Cap Rate 7.50% 7.50% 7.50% 7.50% Overly optimistic
      Cap Rate, but I'l give them this to prove a point
      Value of Properties $4,867 $5,533 $4,589 $4,919
      LTV 50% 50% 50% 50%      
      Maximum re-fi available $2,433 $2,767 $2,294 $2,460      
      Debt due at
      maturity
      $2,621 $3,344 $2,621 $3,344      
      EMI on prior year financing     $861 $1,246      
      Capital Improvements     $542 $195 GGP's press release
      failed to allocate any funds for growth, development, and
      expansion
       
      New Developments     $1,040 $466  
      Total Financing
      Required
      $2,621 $3,344 $5,063 $5,251      
      Shortfall from
      Re-financing
      $188 $577 $2,769 $2,792 Even using the
      extremely optimistic numbers of the press release, GGP falls short of the
      mark!!!
               

      However, we believe that GGP's assumption of NOI growth of 5% for 2008 and 2009 is unrealistic in view of the softness in the U.S
      commercial real estate market, which has already started to experience the ripple impacts of sub-prime crisis. The (now) highly probable US
      recession, along with deteriorating macro-economic conditions, would make operating environment extremely difficult for commercial real
      estate companies like GGP.

Well, I outlined the fall of commercial real estate in general (September of 2007) and the collapse of General Growth Properties in particular (November 2007) in illustrative detail for both subscribers and the general public:

  1. Will the commercial real estate market fall? Of course it will.
  2. Do you remember when I said Commercial Real Estate was sure to fall?
  3. The Commercial Real Estate Crash Cometh, and I know who is leading the way!
  4. Generally Negative Growth in General Growth Properties - GGP Part II
  5. General Growth Properties & the Commercial Real Estate Crash, pt III - The Story Gets Worse
  6. BoomBustBlog.com’s answer to GGP’s latest press release and Another GGP update coming… (among over 700 pages of analysis, review the January 2008 archives or search for “GGP” for more research).

You see, we had an obvious and evident CRE bubble, particularly in retail and mall properties...

This bubble popped, as most may remember, but we never had the opportunity to have the economic cycle complete itself for the powers that be tried their darndest to defy gravity. How, you ask?

  1. A public-private partnership of misdirection allowed the popping bubble to be disguised. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  2. Money follows an economic "Circle of Life". This Circle Was Purposely Disrupted By Multiple Central Banks Worldwide!!!

  3. Even with the "kicking the can down the road mentality", fundamental and macro realities are bound to rear their heads. See The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance and then see Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

 Reggie Middleton on CNBC's Fast Money Discussing Hopium in Real Estate

For those of you who desire a long form explanation of the matters at hand in video form... Reggie Middleton discusses the fall of commercial real estate in the US

Yes, I see portions of CRE on FIRE...

 In regards to the subject company at hand and proffered to my subscribers as a dramatically distressed concern, I offer you the following excerpts the document recently posted for download...

Valuation of properties

Observation  of Company Reported Valuations

Property Name

Acquired Date

Gross Value (as reported by company)

Net Value

Debt

Debt/Net Value

XXX

2003

78,195,000

62,378,000

34,340,000

55.05%

XXX

1998

100,654,000

67,872,000

150,000,000

221%

XXX

2003

92,082,000

70,830,000

85,727,000

121.03%

XXX

2005

185,530,000

157,460,000

151,608,000

96.28%

BoomBustBlog Valuation of Properties

Property Name

Gross Value (as reported by company)

Debt as per B/S

PV, Net Operating Inc. & Sale Price less cost of sales

PV, CFAT and Sales proceed after Taxes

XXX

78,195,000

34,340,000

(478,503)

(34,000,392)

XXX

100,654,000

150,000,000

171,982,661

17,402,660

XXX

92,082,000

85,727,000

38,948,777

(44,819,724)

XXX

185,530,000

151,608,000

165,892,248

11,805,610

Key Observations:

  • Properties acquired in 2003 have negative valuation (after deduction of loan)
  • These properties have lower rentals and lesser operating margins against assumed operating expense of $13.99 per square feet. In other words, they are running negative cash flow, which upon capitalization actually gives them a negative valuation once sales expenses, mortgages and encumbrances are taken into consideration.
  • The properties acquired in 2003 have valuations that are DRAMATICALLY OVERSTATED on the company’s balance sheet. The subject company carries the first property listed on its books at $78,195,000 with a Loan to Net Value of 55%. We have the property valued at ZERO (actually, it has a negative valuation). The 3rd property listed is carried at $92,082,000 where we valued it at significantly less than half of that.
  • Needless to say, these properties' mortgages are substantially underwater.

Extensive portfolio analysis and online valuation models will be available to professional and institutional BoomBustBlog subscribers in order to assist in calculating timing and severity in regards to insolvency. Other BoomBustBlog links of interest to those interest in the weakening of the CRE space...

 The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!

 Prepare For CRE Crash And Burn Marks At A Shopping Mall Near You

Real Estate Cap Rate (Yield) Expanision in Europe

Reggie Middleton Featured in Property EU, one of Europes leading real estate publications

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?

Published in BoomBustBlog

I have made available the latest find in our "REIT at Risk" search. This one has the makings of a grand slam. Subscribers, see Cashflows and Debt Preliminary Analysis (as usual, the latest downloads are listed in the left margin of the homepage). As excerpted from said report:

The shortfall indicates that it is virtually impossible for the company to retire the debt, thus it will have to refinance it at a higher rate or default. If the debt is refinanced in full, it will most likely breach covenants. Even if just the shortfall is refinanced, current credit facilities will be maxed out leaving no room for error and still possibly tripping covenants.

The Company has been meeting its debt obligations through credit facilities in the past 2 years. Its operating cash flows have not been enough to fund its debt repayments and we forecast the retail CRE market to take a material and structural downturn from here. Reference:

    1. The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!
    2. The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
    3. Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

    image001_copy_copy_copy_copy_copy_copy

In addition...

  • 18% of its rents will likely be reduced in 2012 and an additional 21% will be reduced in 2012, unless we see a material firming in lease prices, an occurrence which we not only see happening but to the contrary we anticipate additional softening as demand dwindles.
  • More than 75% of the property portfolio was purchased during the period 2003-2005. This was very close to the apex of the bubble, meaning the there is a very material chance that most (if not all) of these properties have declined significantly in value.

We are in the process of valuing this trust’s portfolio of properties on an individual basis in order to ascertain an accurate enterprise value and gauge both the likelihood and potential scenarios for default and/or fire sale of assets.

Published in BoomBustBlog