A Buyer's Strike

The Buyers Are on Strike!

First, connect the dots:

1. Sub-prime woes are finally acknowledged (at least by some); Federal Reserve and other regulators take two aspirin and decide economy will recover by "walking on it."
2. Hedging markets become ineffective as investors systematically overwhelm single family and then commercial futures markets.
3. 10 year Treasury yields widened 75 basis points between March 15 and June 13.
4. Triple-B rated tranches of commercial mortgage-backed securities (CMBS) and swap spreads widened 90 basis points since March 15.
5. On April 10, Moody's Investors Service announces tightening in underwriting and increase in CMBS subordination levels.
6. CMBS Originators, with religious-like fervor, announce tighter underwriting standards.
7. Sub-prime meltdown "jumps species" (from single-family sector to commercial sector), impacting pricing of triple-B rated CMBS and then the cost of commercial mortgages.
8. B-piece buyers start to kick-out more loans; AAA buyers refuse some large loans; everyone wants a higher premium for higher perceived (or maybe even actual) risk.
9. In CMBS-land, interest-only loans are "out"; pro-forma underwriting is "out"; loan-to-value ratios are lower; debt service coverage ratios are higher; unfortunately, the jury is still "out" as to whether the new time religion will stick.
10. Offerings back up as underwriters do not want to sell at losses; underwriting spreads become increasingly narrow -- deals become even more unprofitable; deals in pipelines are renegotiated as to price and terms.

The dreaded term "Buyer’s Strike" is on everyone’s lips.

While not dispositive of every event leading up today’s Buyer's Strike, the above cited listing of events provides a good idea of why we are where we are today. And people active in the markets are starting to draw comparisons to August of 1998 when Russia defaulted on its Sovereign debt and the credit markets closed for the better part of four months. As evidence that the CMBS "crises" is infectious, the Wall Street Journal online edition this morning featured an article noting that 46 leveraged financing deals (totaling $60 billion) from around the world had been withdrawn since June 22. The number of deals pulled in all 2006: zero!

Right now we are in "wait and see" -- waiting to see who will "blink" first. Will it be the buy side, perceiving spreads have widened enough and yields justify the perceived risk of owning CMBS? Or, will it be the originators who are holding (and financing) substantial amounts of loans in inventory and "suffering" losses every day as the interest rate meter clicks and spreads necessary to sell bonds widen?

Our guess is that this could go on for a while as neither side seems compelled to do anything dramatic. Stay tuned; this is going to be exciting.

Comments

[Sam Park]

It looked more like dump first and ask questions later.

I'm hearing that some firms have been starting vulture funds to get ready to buy oversold securities. They'll probably swoop down towards the end of the year, which is when ARM resets peak.