General Growth's $2.55 billion offering closely followed by CMBS observers

The market for commercial mortgage-backed securities (CMBS) saw a flurry of new issues in October, according to the Barron's/John B. Levy & Co.'s National Mortgage Survey of more than 30 market participants. Two CMBS deals were priced late in the month: a $902 million offering from New York-based Morgan Stanley and New York-based Bear, Stearns & Co. Inc., and a $1.07 billion issue led by New York-based Credit Suisse First Boston. Such conduit operators — financial firms that securitize loans and then package them as CMBS — have been unsure about pricing since the World Trade Center disaster. Last week's deals helped demonstrate standard conduit offering prices in today's market.

CMBS watchers are closely following a $2.55 billion offering from Chicago-based General Growth Properties (GGP), the largest securitization to hit the market since 1998. The issue is composed of 27 regional shopping malls divided into three pools. Currently weak retail sales could make the offering a tough sell. For example, the largest loan is for $635 million on the Ala Moana Center in Honolulu, which showed September sales down a whopping 30.7% compared with the same time last year.

General Growth hopes the issue will cut the company's borrowing costs and supply it with more than $400 million in extra cash. To entice buyers, the offering is based on a 25-year amortization and prohibits the company from substituting malls in the collateral down the road, according to Bernard Freibaum, GGP's chief financial officer. The deal reached the market in early November with both fixed- and floating-rate tranches, a structure designed to attract a wide range of investors.

WTC insurance debate moves to federal court

Discussions about Horsham, Pa.-based GMAC's $563 million securitization on World Trade Center towers 1, 2, 4 and 5 have moved to federal court, where Swiss Re, a major reinsurer of the property, has asked the court to declare that the Sept. 11 attack was one event, not two as alleged by the owner of the master lease on the complex, New York-based Silverstein Properties. According to the Reuters news service, the full value of the WTC policy is $3.5 billion, and Swiss Re would pay out about $750 million of that policy. If the attack is ruled as two events, Swiss Re would owe another $750 million as part of the payment of another $3.5 billion.

To date, no insurance payments have been received for business interruption or property damage, although the October mortgage payment was made to the securities holders by GMAC from cash on hand.

Whether the insurance proceeds are ruled to be $3.5 billion or $7 billion should make no difference to bondholders, according to Janet Price, managing director at Fitch Commercial Mortgage Group, a New York-based rating agency. Fitch reaffirmed the ratings on the offering recently on the basis of only $3.5 billion of coverage being available.

Coverage of World Trade Center 7 is a different story. The first business-interruption insurance payment has been received and the second is expected shortly, so bondholders are assured of payments for November, December and January. But they've been advised that all government leases at the property, including a significant one from the Securities and Exchange Commission (SEC), have been canceled because of the tower's destruction. Analysts also expect the large Citigroup lease to be canceled.

Fitch has reaffirmed the rating for the bonds on this transaction, while Moody's Investors Services has placed them under review for possible downgrade. Based on lease cancellations, Silverstein wants to cut ground-lease payments to the Port Authority of New York and New Jersey to $150,000, the minimum contractually allowable. The agency owns the land on which the WTC stood.

(For more coverage of the latest developments at “ground zero,” please turn to page 10 of this issue.)

John B. Levy is president of John B. Levy & Co. Inc., Richmond, Va. © Dow Jones & Co. Inc.

Barron's/John B. Levy & Co. National Mortgage Survey