American International (NYSE:AIG)
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5 Years : From May 2012 to May 2017
At least six Wall Street dealers are preparing bids for more than $7 billion in complex commercial-mortgage securities, which are part of assets tied to the Federal Reserve Bank of New York's bailout of American International Group Inc. (AIG), according to investors briefed by dealers.
Deutsche Bank (DB, DBK.XE), Bank of America Corp. (BAC), Morgan Stanley (MS), Credit Suisse (CS), Goldman Sachs Group Inc. (GS) and Barclays (BCS, BARC.LN) are preparing bids for the debt securities, the investors said.
The dealers are focused on so-called commercial-real-estate collateralized-debt-obligations, which are a corner of the $47 billion face amount of debt held by the New York Fed portfolio known as Maiden Lane III. They are primarily focused on dismantling the so-called CRE CDOs because the underlying commercial mortgage-backed securities are worth more as individual pieces and could likely generate more trading revenue, the investors said.
But the liquidation rests on the elimination of an interest-rate swap with Barclays, the counterparty in the derivative transaction. As the swap was put on when interest rates were higher, the contract has risen in value and would require a payment of more than $1 billion to Barclays if the CDO was to be unwound, two of the investors said.
Spokesmen for Deutsche Bank, Bank of America, Morgan Stanley, Credit Suisse, Barclays, Goldman Sachs and the New York Fed declined to comment.
Investors have intensified their focus on the CRE CDOs last week after the New York Fed tweaked investment guidelines on the portfolio, setting the stage for possible sales. A pair of commercial-mortgage-bond CDOs issued by Deutsche Bank drew immediate focus as BlackRock had been collecting preliminary bids from dealers, a person familiar with the matter said when Dow Jones Newswires first reported the development last week.
The potential for bulk sales of CDOs has rattled the market because of the impact of additional supply, just as investors are questioning the wisdom behind a four-month rally. The flare-up in Europe's debt crisis and signs that the U.S. economic recovery was slowing also decreased risk appetites, exacerbating a selloff in CMBS.
The risk premium on a benchmark commercial-mortgage bond jumped to 235 basis points over an interest-rate benchmark from 180 basis points in March, giving back virtually the entire rally of 2012, according to Credit Suisse's Locus analytics platform. CMBS spreads were bid about 10 basis points tighter on Thursday, however, as investors heartened by prospects of long-term low interest rates turned back to riskier debt.
-By Al Yoon, Dow Jones Newswires; 212-416-3216; firstname.lastname@example.org