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Private Market Steps In

CONCERNS ABOUT TERRORISM insurance on buildings continue to dog the market for commercial mortgages, according to the Barron's/John B. Levy & Co. National Mortgage Survey of market participants. Coverage still is not widely available, but a private-market solution is emerging amid the lack of any government help thus far.

Among the large insurers currently offering terrorism insurance are American International Group, Lloyd's of London, Berkshire Hathaway Group, The Chubb Corp., Travelers Insurance and Liberty Mutual Group. Other large insurers, including Allianz Group, are considering entering the market.

The policies now available come with several exclusions, the most common being coverage for nuclear, biological and chemical attacks. Before the Sept. 11 terrorist attacks, chemical and biological events were included in almost all policies. But property investors, eager to get back into deal making in a big way, have accepted less than full insurance on large loans.

The appearance of numerous coverage providers has led to a sharp decline in premiums.

One investor reports that in early March a $50 million terrorism policy was offered with an annual premium of $1.4 million; a month later it was available for $200,000. As Richard Avidon, assistant vice president and CMBS analyst for Alliance Capital Management puts it: “The market has clearly moved faster than the politicians.”

Big Sale in the Big Apple

The re-emergence of terrorism insurance is fueling large property sales. Most notable is the pending sale of 1515 Broadway, the 1.75 million sq. ft. office building in New York's Times Square that is the home to Viacom International and other tenants.

Although the sale won't close for months, the new owner, SL Green Realty Corp., has arranged $335 million in financing from Lehman Brothers and Bear Stearns. The future owner declined to comment, but industry sources close to the deal indicate that SL Green Realty has cobbled together a complicated package of terrorism insurance totaling some $250 million.

The availability of terrorism insurance isn't reflected in the rich yields in the secondary market on mortgage securities backed by loans on single properties. Some analysts believe that this so-called terrorism-insurance premium is particularly overblown at the triple-A level.

“Single assets are a great place to try and grab yield,” says Patrick Corcoran, a CMBS analyst with JP Morgan Chase. The most interesting single-asset transaction involves Rockefeller Center, where terrorism coverage is up for renewal in May. Currently, buyers of mortgage securities are shying away, fearing a ratings downgrade.

‘Sticker Shock’

Higher interest rates, lower loan volume and excess cash sum up the market for commercial mortgages. Interest rates have been on a tear, with Treasury yields rising a whopping 120 basis points, or 1.20 percentage points, since their November low, inflicting sticker shock on borrowers and sending many into retreat.

Commercial mortgage-backed securities are drawing strong investor interest, with buyers focusing on the mezzanine classes — those rated double-A to triple-B. As a result, the yield curve, or the yield difference, between triple-A and triple-B has flattened dramatically. The difference is now 67 basis points, compared with 84 basis points on March 1 and 91 basis points in mid-February.

Some observers argue that this flattening reflects an over-anticipation of economic recovery.

“Any sell off in corporates (corporate bonds) could leave these CMBS classes looking obscenely rich,” says Darrell Wheeler, a CMBS analyst with Salomon Smith Barney.

Mortgage investors sense that the hotel market has recovered, or at least stabilized. The March 2002 operating results for many hotels are not much different than the figures posted a year ago. Although hotel lenders are still not an aggressive bunch, some loans of up to 65% of value are available at spreads starting at 275 basis points and rising sharply higher.

John B. Levy is president of John B. Levy & Co. Inc. ( in Richmond, Va. Dow Jones & Co. Inc., 2002

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

To 10-year U.S. Treasuries
Rating 4/1/02 3/4/02
AAA 112-113 115-116
AA 122-123 132-135
A 134-137 151-154
BBB 176-181 195-200
BB 525-550 525-550
*in basis points, or hundredths of a percentage point

Term of loan Prime Mtge. Range 4/1/02 Prime Mtge. RATE Prime Mtge. Range 3/4/02
5 Years 6.91-7.01% 6.96% 6.37-6.47%
7 Years 7.31-7.36% 7.31% 6.90-7.00%
10 Years 7.51-7.56% 7.51% 7.05-7.15%
For loans of $5 million and up, on amortization schedules of 25-30 years, that can be funded in 60-120 days with 0-1 point.
*Interest rates

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