project finance is they key, page-2

BT, you are spot on... there is value in keeping Airport Link afloat, but not for existing equity holders under the current arrangements... here's a real life example of what I think you are talking about.... I wish I could work out the value for equity participant who want to stay in of the project financing arrangements in the current market environment.

http://www.businessweek.com/investing/insights/blog/archives/2009/04/implications_of.html?chan=top+news_top+news+index+-+temp_investing


Implications of John Hancock Tower Auction Grim for Commercial Real Estate

Posted by: Aaron Pressman on April 01

The most iconic building on the Boston skyline, the John Hancock Tower designed by I.M. Pei, sold at auction yesterday for $661 million to bargain hunting investors Normandy Real Estate Partners and Five Mile Capital Partners. The sale followed a default on part of the debt used to finance the purchase of the building for $1.3 billion in 2006. The winning bid, the only bid in fact, was actually $20.1 million plus the assumption of a $640.5 million first mortgage.

How did the winning bidders maneuver into such strong position? By buying up a substantial stake in debt that was less senior than the first mortgage but came due much sooner. In January, the 2006 buyer, Broadway Partners, failed to repay the debt, known as a mezzanine loan, and Normandy and Five Mile moved quickly to put the borrower into default.

But what does the sale say about the value of outstanding commercial real estate loans made during the credit bubble years? According to “Tyler Durden,” the pseudonymous author of the great blog Zero hedge, the true value of the purchase was much lower if you consider the financing involved. Since the new buyers put up only $20 million of a $661 million deal, or about 3%, while keeping the prior mortgage, the deal’s loan-to-value ratio is about 97%. That may have been a reach even during the boom years but is nothing like the ratio that lenders would accept in a typical real estate transaction today. And the rate on that mortgage is a measly 5.6%. The lenders on that first mortgage should get their money back, it seems.

Citing some Wall Street analysis of the deal, Durden figures that in a more typical deal today, the first mortgage would be at a 60% loan-to-value ratio and a rate of 8%, so that would cover only $400 million of the Hancock Tower. Secondary financing on the remaining borrowed amount of $240 million — if it could even get done — would be in the range of 15%. That’s a blended rate of about 11%. The value of borrowing at 5.6% with an 11% yield is $190 million, by the analysis Durden cites, leaving the true cost of the building’s purchase at $470 million, just one-third of what it sold for three years ago. Look out below!