Sunday, 27 January 2008 00:00

Is this the Breaking of the Bear?

How we got started

Anybody who follows my blog knows that I am extremely bearish on the global macro environment, particularly risky and financial assets. As I see it, the Doctor(s) FrankenFinance are constantly percolating econo-alchemical brews such as that of the ongoing “Great Macro Experiment,” eliciting undulating waves of joy and elation from amateur speculators such as myself while simultaneously creating risk/reward traps that many a financial and real asset concern may never escape from. While discussing with my team how best to move forward to find a target of our “Macro Experiment” victim analysis in the financial sector, I was queried as to what to look for in creating the short list. Evaluating investment banks, like evaluating the monolines, is not necessarily a straightforward endeavor. No matter how you do it, someone is going to disagree. This is what makes what I do so appealing. All I have to answer to is performance. I just need a profitable result in order to be successful. No corporate politics or conflicts of interests to get in my way. In the end, absolute return is the ultimate criteria, and not whether it is accepted by the ivy league or academia, industry practitioners, sponsors, clients or whether or not XZY bank has been doing it differently for the last 25 years. Investing for your own account enforces a certain code of realism that, at times, may not be shared by others. So, I used that realism as my strength and my focal point to guide the creation of a short list, the ultimate target, and the valuation/risk analysis methodology. I simply said, in the REAL world where I would have to make some money from some REAL assets,throwing off REAL cash flows and REAL market transactions? Using this “Reggie REALity Engine” (so to speak) to power the analysis proved very enlightening. We found banks that counted spread guesstimates as assets. We found banks that could not afford to keep their best employees. We found too many banks that faced insolvency in the very near future. We found a lot. To keep this story short, let’s just say we used the engine to find that truth that nobody really wants to hear. That truth as marked to reality. This resulted in a short list of 2 firms. The first one is Bear Stearns, which we will delve into here. The second one is what I call, “The Riskiest Bank on the Street”, and the blog post and analysis will be out in a few days. Using a Sherlock Holmes style of forensic analysis, we have tried very hard not to leave anything out of our scope of analysis. In the case of Bear Stearns, it was not easy since very little info was available outside of the plain vanilla 10Q, 10K, etc. They also volunteered very little information. Much of this is investigative analysis and it would be much more detailed if we had access to the Bear Stearns inventory. We wrote to Bear Stearns’ investor relations department asking for more information on the company’s exposure to risky assets and their breakup. So far, no word back. No need to be concerned for my health, I’m not holding our breath…

Alas, as I stated earlier, it is that truth that no one wants to hear. So if you are one of those "no ones" that don't want to hear the truth, cover your ears, cause here we go...

Bear Stearns is in Real trouble

Bear Stearns will soon be, if not already, in a fight for its life. It is beset with the possibility of a criminal indictment (no Wall Street firm has ever survived a criminal indictment), additional civil litigation, and client defection and alienation. Despite all of these, the biggest issues don't seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. For some reason, the Street consistently underestimates the severity of this real estate crash. If you look throughout my blog, it appears as if I have an outstanding track record. I would love to take the credit as superior intelligence, but the reality of the matter is that I just respect the severity of the current housing downturn - something that it appears many analysts, pundits, speculators, and investors have yet to do with aplomb. With a primary value driver linked to the biggest drag on the US economy for the last century or so, Bear Stearn's excessive reliance on highly "modeled" and real asset/mortgage backed products in its portfolio may potentially be its undoing. This is exacerbated significantly by leverage, lack of transparency, and products that are relatively illiquid, even when the mortgage days were good.

The last year at the Bear hasn’t been a good one – a quick recap

Bear Stearns Companies Inc (BSC) has been at the forefront of the ongoing subprime mortgage crisis and has been considered the main trigger for the credit turmoil with the failure of its two hedge funds in July 2007. These failures marked the beginning of credit turmoil and severely tarnished the company’s reputation. Bear Stearns also has significant exposure toward the troublesome mortgage securities as compared to its peers in terms of the equity of the company. Bear Stearns specialized in mortgage related securities, at a time when real estate (both residential and commercial) and real estate related credit, experienced a severe bursting of a prolonged and historically unprecedented bubble. If historical mean values are any indication of future trends, we are just in the very beginning of a very steep correction in both residential and commercial real estate values. This bodes quite ill for the Bear.

Bear Stearns has a Level 3 assets (see Banks, Brokers, & Bullsh1+ part 1 ) worth $27 billion, investments in SIVs of $41 billion, and off balance sheet SIVs of $21.3 billion. Furthermore, Bear Stearns has counterparty credit exposure (Banks, Brokers, & Bullsh1+ part 2 ) towards Ambac which recently was downgraded from AAA to AA by Fitch Rating Agency. I have written extensively on Ambac – material that was quite controversial, and in hindsight highly prescient. I feel I have a handle on this company's situation, and it is not as positive as management and investors would make it out to (see Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion of Equity, Follow up to the Ambac Analysis, Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility, Ambac Management Should Read Blogs More Often, Ambac Now Has a Municipal Bond Issue to Worry About - I'm not going to say I told you so! , and Download a "Window" into Ambac's Problems). Faltering counterparties have further aggravated the company's credit position. Bear Stearns' 5 year CDS spread is also widening significantly, following concerns that the company will need to take additional write down on assets in the coming quarters. The deteriorating US credit situation has negatively impacted almost all the banks and brokers alike with $133 billion of asset write downs to date, with two of the biggest names in the industry, Citigroup and Merrill Lynch, leading the pack. We believe the amount of write downs taken by Bear Stearns as compared to other big investment banks seems insufficient. Moreover, the selling of stakes by some of the top executives at Bear Stearns validates the trouble at the company is far from over and is likely to get worse.

Published in BoomBustBlog
Saturday, 26 January 2008 19:00

Is this the Breaking of the Bear?

How we got started

Anybody who follows my blog knows that I am extremely bearish on the global macro environment, particularly risky and financial assets. As I see it, the Doctor(s) FrankenFinance are constantly percolating econo-alchemical brews such as that of the ongoing “Great Macro Experiment,” eliciting undulating waves of joy and elation from amateur speculators such as myself while simultaneously creating risk/reward traps that many a financial and real asset concern may never escape from. While discussing with my team how best to move forward to find a target of our “Macro Experiment” victim analysis in the financial sector, I was queried as to what to look for in creating the short list. Evaluating investment banks, like evaluating the monolines, is not necessarily a straightforward endeavor. No matter how you do it, someone is going to disagree. This is what makes what I do so appealing. All I have to answer to is performance. I just need a profitable result in order to be successful. No corporate politics or conflicts of interests to get in my way. In the end, absolute return is the ultimate criteria, and not whether it is accepted by the ivy league or academia, industry practitioners, sponsors, clients or whether or not XZY bank has been doing it differently for the last 25 years. Investing for your own account enforces a certain code of realism that, at times, may not be shared by others. So, I used that realism as my strength and my focal point to guide the creation of a short list, the ultimate target, and the valuation/risk analysis methodology. I simply said, in the REAL world where I would have to make some money from some REAL assets,throwing off REAL cash flows and REAL market transactions? Using this “Reggie REALity Engine” (so to speak) to power the analysis proved very enlightening. We found banks that counted spread guesstimates as assets. We found banks that could not afford to keep their best employees. We found too many banks that faced insolvency in the very near future. We found a lot. To keep this story short, let’s just say we used the engine to find that truth that nobody really wants to hear. That truth as marked to reality. This resulted in a short list of 2 firms. The first one is Bear Stearns, which we will delve into here. The second one is what I call, “The Riskiest Bank on the Street”, and the blog post and analysis will be out in a few days. Using a Sherlock Holmes style of forensic analysis, we have tried very hard not to leave anything out of our scope of analysis. In the case of Bear Stearns, it was not easy since very little info was available outside of the plain vanilla 10Q, 10K, etc. They also volunteered very little information. Much of this is investigative analysis and it would be much more detailed if we had access to the Bear Stearns inventory. We wrote to Bear Stearns’ investor relations department asking for more information on the company’s exposure to risky assets and their breakup. So far, no word back. No need to be concerned for my health, I’m not holding our breath…

Alas, as I stated earlier, it is that truth that no one wants to hear. So if you are one of those "no ones" that don't want to hear the truth, cover your ears, cause here we go...

Bear Stearns is in Real trouble

Bear Stearns will soon be, if not already, in a fight for its life. It is beset with the possibility of a criminal indictment (no Wall Street firm has ever survived a criminal indictment), additional civil litigation, and client defection and alienation. Despite all of these, the biggest issues don't seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. For some reason, the Street consistently underestimates the severity of this real estate crash. If you look throughout my blog, it appears as if I have an outstanding track record. I would love to take the credit as superior intelligence, but the reality of the matter is that I just respect the severity of the current housing downturn - something that it appears many analysts, pundits, speculators, and investors have yet to do with aplomb. With a primary value driver linked to the biggest drag on the US economy for the last century or so, Bear Stearn's excessive reliance on highly "modeled" and real asset/mortgage backed products in its portfolio may potentially be its undoing. This is exacerbated significantly by leverage, lack of transparency, and products that are relatively illiquid, even when the mortgage days were good.

The last year at the Bear hasn’t been a good one – a quick recap

Bear Stearns Companies Inc (BSC) has been at the forefront of the ongoing subprime mortgage crisis and has been considered the main trigger for the credit turmoil with the failure of its two hedge funds in July 2007. These failures marked the beginning of credit turmoil and severely tarnished the company’s reputation. Bear Stearns also has significant exposure toward the troublesome mortgage securities as compared to its peers in terms of the equity of the company. Bear Stearns specialized in mortgage related securities, at a time when real estate (both residential and commercial) and real estate related credit, experienced a severe bursting of a prolonged and historically unprecedented bubble. If historical mean values are any indication of future trends, we are just in the very beginning of a very steep correction in both residential and commercial real estate values. This bodes quite ill for the Bear.

Bear Stearns has a Level 3 assets (see Banks, Brokers, & Bullsh1+ part 1 ) worth $27 billion, investments in SIVs of $41 billion, and off balance sheet SIVs of $21.3 billion. Furthermore, Bear Stearns has counterparty credit exposure (Banks, Brokers, & Bullsh1+ part 2 ) towards Ambac which recently was downgraded from AAA to AA by Fitch Rating Agency. I have written extensively on Ambac – material that was quite controversial, and in hindsight highly prescient. I feel I have a handle on this company's situation, and it is not as positive as management and investors would make it out to (see Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion of Equity, Follow up to the Ambac Analysis, Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility, Ambac Management Should Read Blogs More Often, Ambac Now Has a Municipal Bond Issue to Worry About - I'm not going to say I told you so! , and Download a "Window" into Ambac's Problems). Faltering counterparties have further aggravated the company's credit position. Bear Stearns' 5 year CDS spread is also widening significantly, following concerns that the company will need to take additional write down on assets in the coming quarters. The deteriorating US credit situation has negatively impacted almost all the banks and brokers alike with $133 billion of asset write downs to date, with two of the biggest names in the industry, Citigroup and Merrill Lynch, leading the pack. We believe the amount of write downs taken by Bear Stearns as compared to other big investment banks seems insufficient. Moreover, the selling of stakes by some of the top executives at Bear Stearns validates the trouble at the company is far from over and is likely to get worse.

Saturday, 26 January 2008 19:00

Is this the Breaking of the Bear?

How we got started

Anybody who follows my blog knows that I am extremely bearish on the global macro environment, particularly risky and financial assets. As I see it, the Doctor(s) FrankenFinance are constantly percolating econo-alchemical brews such as that of the ongoing “Great Macro Experiment,” eliciting undulating waves of joy and elation from amateur speculators such as myself while simultaneously creating risk/reward traps that many a financial and real asset concern may never escape from. While discussing with my team how best to move forward to find a target of our “Macro Experiment” victim analysis in the financial sector, I was queried as to what to look for in creating the short list. Evaluating investment banks, like evaluating the monolines, is not necessarily a straightforward endeavor. No matter how you do it, someone is going to disagree. This is what makes what I do so appealing. All I have to answer to is performance. I just need a profitable result in order to be successful. No corporate politics or conflicts of interests to get in my way. In the end, absolute return is the ultimate criteria, and not whether it is accepted by the ivy league or academia, industry practitioners, sponsors, clients or whether or not XZY bank has been doing it differently for the last 25 years. Investing for your own account enforces a certain code of realism that, at times, may not be shared by others. So, I used that realism as my strength and my focal point to guide the creation of a short list, the ultimate target, and the valuation/risk analysis methodology. I simply said, in the REAL world where I would have to make some money from some REAL assets,throwing off REAL cash flows and REAL market transactions? Using this “Reggie REALity Engine” (so to speak) to power the analysis proved very enlightening. We found banks that counted spread guesstimates as assets. We found banks that could not afford to keep their best employees. We found too many banks that faced insolvency in the very near future. We found a lot. To keep this story short, let’s just say we used the engine to find that truth that nobody really wants to hear. That truth as marked to reality. This resulted in a short list of 2 firms. The first one is Bear Stearns, which we will delve into here. The second one is what I call, “The Riskiest Bank on the Street”, and the blog post and analysis will be out in a few days. Using a Sherlock Holmes style of forensic analysis, we have tried very hard not to leave anything out of our scope of analysis. In the case of Bear Stearns, it was not easy since very little info was available outside of the plain vanilla 10Q, 10K, etc. They also volunteered very little information. Much of this is investigative analysis and it would be much more detailed if we had access to the Bear Stearns inventory. We wrote to Bear Stearns’ investor relations department asking for more information on the company’s exposure to risky assets and their breakup. So far, no word back. No need to be concerned for my health, I’m not holding our breath…

Alas, as I stated earlier, it is that truth that no one wants to hear. So if you are one of those "no ones" that don't want to hear the truth, cover your ears, cause here we go...

Bear Stearns is in Real trouble

Bear Stearns will soon be, if not already, in a fight for its life. It is beset with the possibility of a criminal indictment (no Wall Street firm has ever survived a criminal indictment), additional civil litigation, and client defection and alienation. Despite all of these, the biggest issues don't seem all that prevalent in the media though. Bear Stearns is in a real financial bind due to the assets that it specialized in, and it is not in it by itself, either. For some reason, the Street consistently underestimates the severity of this real estate crash. If you look throughout my blog, it appears as if I have an outstanding track record. I would love to take the credit as superior intelligence, but the reality of the matter is that I just respect the severity of the current housing downturn - something that it appears many analysts, pundits, speculators, and investors have yet to do with aplomb. With a primary value driver linked to the biggest drag on the US economy for the last century or so, Bear Stearn's excessive reliance on highly "modeled" and real asset/mortgage backed products in its portfolio may potentially be its undoing. This is exacerbated significantly by leverage, lack of transparency, and products that are relatively illiquid, even when the mortgage days were good.

The last year at the Bear hasn’t been a good one – a quick recap

Bear Stearns Companies Inc (BSC) has been at the forefront of the ongoing subprime mortgage crisis and has been considered the main trigger for the credit turmoil with the failure of its two hedge funds in July 2007. These failures marked the beginning of credit turmoil and severely tarnished the company’s reputation. Bear Stearns also has significant exposure toward the troublesome mortgage securities as compared to its peers in terms of the equity of the company. Bear Stearns specialized in mortgage related securities, at a time when real estate (both residential and commercial) and real estate related credit, experienced a severe bursting of a prolonged and historically unprecedented bubble. If historical mean values are any indication of future trends, we are just in the very beginning of a very steep correction in both residential and commercial real estate values. This bodes quite ill for the Bear.

Bear Stearns has a Level 3 assets (see Banks, Brokers, & Bullsh1+ part 1 ) worth $27 billion, investments in SIVs of $41 billion, and off balance sheet SIVs of $21.3 billion. Furthermore, Bear Stearns has counterparty credit exposure (Banks, Brokers, & Bullsh1+ part 2 ) towards Ambac which recently was downgraded from AAA to AA by Fitch Rating Agency. I have written extensively on Ambac – material that was quite controversial, and in hindsight highly prescient. I feel I have a handle on this company's situation, and it is not as positive as management and investors would make it out to (see Ambac is Effectively Insolvent & Will See More than $8 Billion of Losses with Just a $2.26 Billion of Equity, Follow up to the Ambac Analysis, Monolines swoon, CDOs go boom & I really wonder why the ratings agencies are given any credibility, Ambac Management Should Read Blogs More Often, Ambac Now Has a Municipal Bond Issue to Worry About - I'm not going to say I told you so! , and Download a "Window" into Ambac's Problems). Faltering counterparties have further aggravated the company's credit position. Bear Stearns' 5 year CDS spread is also widening significantly, following concerns that the company will need to take additional write down on assets in the coming quarters. The deteriorating US credit situation has negatively impacted almost all the banks and brokers alike with $133 billion of asset write downs to date, with two of the biggest names in the industry, Citigroup and Merrill Lynch, leading the pack. We believe the amount of write downs taken by Bear Stearns as compared to other big investment banks seems insufficient. Moreover, the selling of stakes by some of the top executives at Bear Stearns validates the trouble at the company is far from over and is likely to get worse.

Friday, 25 January 2008 00:00

GGP: Foreclosure vs Asset Sale

As
my readers should have gathered from my previous posts, I believe GGP
is running into a cash shortfall over the next three operating years.
Roughly 5% of their properties are candidates for foreclosure, due to
LTVs in excess of 100% (basically, underwater) or sparse to negative
cash flows. To further illustrate this point, I have carried out a GGP
valuation under the additional two scenarios - 'Foreclosure' and 'Sale
of unencumbered properties to meet financing requirements'.

Foreclosure of properties

Since
most of the GGP property specific mortgages are on a non-recourse
basis, it actually stands to gain on foreclosure of its highly
leveraged properties as the value of these loans are considerably
higher than the value of the properties. Since these highly leveraged
properties are primarily a drag on company’s overall valuation, the
company’s valuation stands to gain on foreclosure of these properties
despite taking into consideration additional cost of borrowing (even
assuming a 300 basis point increase in the interest cost on
refinancing). In view of the fact that GGP would still have to raise
additional finance after allowing foreclosure, GGP may opt not to
foreclose its properties and instead may sell some of its properties to
re-pay its upcoming debt obligations.

The
following is an extract from GGP’s 3Q2007 earnings release highlighting
that GGP itself considers the foreclosure option under its non-recourse
mortgages as a valuable benefit:

“But yet, the fact that we use primarily non-recourse mortgage debt,
which is a different tack than some of the larger REITs who use
unsecured debt as their principal source of debt capital, is in our
view something that has always been undervalued or underappreciated in
terms of its significance. We don't expect ever to default on a loan,
but that is the benefit of the bargain you make with the lender. That's
the definition of non-recourse. And if there was a property with a loan
maturing that was worth substantially less than the loan amount, it
would certainly be something that we would have the option to do
without doing anything that's inconsistent with the arrangement that we
made. So as I said, I don't expect we'll ever do it, we don't
anticipate ever doing it. But I think the fact that you could do it if
there was a serious problem with a particular asset is a valuable
benefit
.” Bernard Freibaum - General Growth Properties Inc - EVP, CFO

Sale of unencumbered properties

In
case the company sells a few of its office properties to re-pay its
debt, there is no impact on valuation since the benefit from interest
savings will be more or less offset by loss of present value of
properties sold. Moreover, since re-paying debt through re-financing
additional debt or through sale of its properties is more of a
financing decision (and not an operating decision) there will be no
significant impact on the company’s valuation as such.

Published in BoomBustBlog
Friday, 25 January 2008 00:00

GGP Refinancing Sensitvity Analysis

GGP sensitivity analysis –

We have conducted a sensitivity analysis for GGP’s re-financing requirement in 2008 and 2009 based on three parameters – LTV, NOI growth and interest rates. The following is a ‘stress test’ to ascertain any additional financing requirements for GGP under three scenarios:

Published in BoomBustBlog
Maybe if
the CEO's compensation was a little more aligned with the shareholder's
compensation, shareholders would be happier and short sellers would be
less prevalent. As it stands now, the CEO is getting paid more (much
more) than the entire company made for the year. I know what I would be
saying if I was a long shareholder...
Item 5.02
Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers
(e) On
January 22, 2008, the Management Development and Compensation Committee
(the “Compensation Committee”) of KB Home (the “Company”) determined
fiscal 2007 bonuses for the Company’s Named Executive Officers, in the
amounts set forth below:
Published in BoomBustBlog

See Lennar, Voodoo and Zombies fully consolidated and Lennar Insolvent: Enron redux??? , then read the press release below...

UPDATE: Lennar Posts Record Loss In FY4Q On Land Losses January 24, 2008: 07:45 AM EST

DOW JONES NEWSWIRES

Lennar Corp.'s (LEN) fiscal fourth-quarter net loss ballooned, breaking a quarter-old record for the company, as the company took a $1.2 billion loss on land sales. Near-term conditions may continue to decline.

For the quarter ended Nov. 30, the Miami builder reported net loss of $1.25 billion, or $7.92 a share, compared with a year-earlier net loss of $195.6 million, or $1.24 a share. Lennar posted a fiscal third-quarter net loss of $ 513.9 million, a then-record for the 53-year-old company.

The land loss consists of $970.1 million in valuation adjustments. Lennar, the nation's second-largest home builder, stunned investors in November when it announced a "strategic land investment venture" with Morgan Stanley Real Estate, selling about 11,000 home sites in 32 communities, including raw land and partially developed sites for $525 million - nearly 60% below the $1.3 billion book value.

Lennar also wrote off $217.6 million of deposits and pre-acquisition costs in the latest quarter on 12,500 home sites under option that Lennar doesn't intend to purchase. Year-earlier items included $119.9 million in land losses and $ 111.1 million in write-offs.

Revenue dropped 49% to $2.18 billion.

The mean estimates of analysts surveyed by Thomson Financial were for a loss of $1.65 a share on revenue of $2.06 billion.

Shares traded at $15 in premarket activity Thursday, compared with Wednesday's close of $14.94.

President and Chief Executive Stuart Miller said, "While we are hopeful that recent interest-rate moves by the Federal Reserve and recent plans proffered by the federal government will have a stabilizing impact on the housing market, market conditions remained depressed and, in fact, continued a downward slide through the end of our fourth quarter."

Lennar's new home orders fell 51% to 4,761, while deliveries, excluding unconsolidated entities, dropped 49% to 6,810. The average sales price fell 3.7% to $291,000.

Gross margins on home sales, excluding valuation adjustments, fell to 12.1% from 14.4%.

Miller said, "As we look ahead to 2008, we are not expecting market conditions to improve, and perhaps might continue to decline in the near term. Nevertheless, the strength of our balance sheet, bolstered by the cash generated through our fourth-quarter strategic moves, will keep us well positioned to weather these turbulent times."

Ground zero of the credit crunch - the housing market - has yet to register anything close to a recovery. Builders continue to cut inventory prices and many new homes are now cheaper than existing homes. But with some consumers unable to secure funding - and others worried about deteriorating value - traffic has slowed to a trickle and cancellation rates remain high.

Published in BoomBustBlog

In its press release on January 8, 2008, GGP released the following statement with respect to the financing of its debt liabilities due in 2008 and 2009 -

"The debt maturing in 2008 includes $1.816 billion of mortgage and other secured debt, $722 million of remaining bridge acquisition debt, and $83 million of notes. The Company estimates that property-level income, a measure used by lenders for financing purposes, will be approximately $365 million in the twelve months following the maturity date of the debt maturing in 2008. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $4.867 billion. Accordingly, the maturing 2008 mortgage debt of $1.816 billion represents approximately 37.3% of the financing value of the properties.

The debt maturing in 2009 includes $2.744 billion of mortgage and other secured debt and $600 million of notes. The Company estimates that property-level income will be approximately $415 million in the twelve months following the maturity date of the debt maturing in 2009. Using an average capitalization rate of 7.5% to determine loan capacity, the properties would have a value for financing purposes of $5.533 billion. Accordingly, the maturing 2009 mortgage debt of $2.744 billion represents approximately 49.6% of the financing value of the properties"

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.

Published in BoomBustBlog

Hat tip to TradingBR:

Rating Action: Channel Reinsurance Ltd.

Moody's puts Channel Re and Two Rock on review for downgrade

New York, January 23, 2008 -- Moody's Investors Service announced today that it has placed the Aaa insurance financial strength rating of Channel Reinsurance Ltd. (Channel Re) on review for downgrade. At the same time, Moody's also placed on review for downgrade the Aa3 rating assigned to contingent capital securities issued by Two Rock Pass Through Trust, a related financing trust.

Channel Re is a financial guaranty reinsurance company dedicated to providing reinsurance capacity to MBIA Insurance Corporation (MBIA), the New York based financial guaranty insurance company. Channel Re has reinsured a broad range of risks from MBIA, including recent vintage second-lien mortgage securitizations, as well as significant amounts of ABS CDOs containing such exposures.

Moody's stated that today's rating actions were motivated by growing concern about the possible effect of these mortgage-related risks on Channel Re's credit profile in light of the prospect for worsening performance in the mortgage market and the inherent volatility in RMBS and ABS CDO exposures.

"As part of its review, Moody's will evaluate the possible impact of this exposure on Channel Re's risk-adjusted capital adequacy and franchise value", said Ranjini Venkatesan, a Moody's analyst. "We will also assess possible changes in the value that Channel Re provides to MBIA as a result of both companies' evolving credit and franchise profiles in the rapidly changing financial guaranty markets."

Moody's additionally noted that Channel Re's credit profile also has implications for the credit profile of MBIA, with strain at Channel Re placing incremental pressure on MBIA's capital adequacy, and will be a consideration in the ongoing review of MBIA's ratings. MBIA's ratings were placed on review for downgrade on January 17, 2008.

Now, the owner's of Channel Re, Rennaisance Re and Partner Re have already marked their investments in Channel Re down to near zero (see my take ). Again, Moody's is way behind the curve, being much more reactive and not very predictive. More importantly, Channel Re was formed exclusively to reinsure MBIA, forcing an extreme amount of concentration and correlation risk. MBIA also owne 17% of Channel Re, and is also on negative ratings watch. Given the outlook of the owners of Channel Re, a downgrade should be inevitable, but who knows when dealing with the big three. If a downgrade were to occur, it should immediately undercapitalize MBIA, and will compound the problems that would occure if they themselves get downgraded.

Published in BoomBustBlog

This should put to bed the notion that monoline insurer's books
shouldn't be marked to market. The reason why Ambac has big operating
losses is because the stuff that they insure is worth less and taking
big losses. It's just that simple. If you allowed them to keep "fake"
values on the books while the real stuff is tanking, then when the
insured losses are actually realized, shareholders will get slammed
very, very hard. If the mark to market losses are truly inaccurate,
then when things are realized, the company will be able to book a gain.
Until then...

The losses are real, and market pricing cannot be
circumvented for any significant amount of time without the perpetrator
having to pay penance.

'nuff said! (for those that ever followed Stan Lee:-) )

Published in BoomBustBlog