Public - Private Investment Program (ppip) Review
After some delay and much anticipation, funds from the Public-Private Investment Program have started to trickle into the capital markets
. One of the main goals of the program was to spur liquidity in the securitized debt market. The hope was that increased liquidity and activity in this market would hasten the return of asset securitization as a prominent funding vehicle. As is widely known, the extension of credit through the securitization markets has completely dried up in commercial real estate.
So what are the early indications for success for this program? Well, it is clearly to early to gauge the success in terms of the CMBS market, but early signs suggest that PPIP managers are confining their purchase activity to the very highest levels of the capital structure. This does not bode well for the levels right below, i.e., the AM and AJ tranches, which in turn will likely translate into the inability of some of the more aggressively underwritten loans from 2005-2008 to refinance. As a result, distressed loan opportunities in desperate need of capital infusions may become plentiful.
There is also a component of the program meant to provide financing for legacy loans on commercial real estate. The purpose (or thinking, in terms of the federal government) is to help alleviate bank balance sheets of the burden of carrying troubled loans originated before the beginning of the liquidity crisis. The existence of these loans raises two very critical issues that have far-reaching implications.
First, where should financial institutions that hold this debt be marking it from a valuation perspective? To some degree, regulatory relief has been provided as some institutions have exercised the language of FAS 157. The issue is, however, what is the true value and will banks need additional capital relief from the government if they are forced to write down the value of the debt. Second, the other broad implication that stretches into the CMBS arena concerns price discovery and the necessity of that process. If banks begin dumping their debt holdings into a very thinly traded market, that valuation will and should be translated into the debt in the securitized world of CMBS. For now, PPIP is encouraging buyers to step forward, but the real need is for sellers to emerge with items on which to bid.
by: Investcap Advisors
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