Will Life Companies Step up to the Plate?

I recently attended a conference in which a simple, but intriguing question was posed: Who is, and who will be picking up the slack in the conduit marketplace's absence?

The answers were as follows:

- Savings banks are out lending, doing 5 year deals.

- Life companies are lending to their existing clients at relatively low leverage (50-60%), being more conservative, and not showing interest in new relationships.

- Big banks, on the flip side, are not extending credit to their clients. 10 year fixed deals are near impossible to find anywhere.

- We should continue to see high yield players exploit that gap to get people through refinancing when their notes come due.

- Equity firms are in the market but aren’t looking at highly leveraged deals, but rather those is the 40-50% range.

- Providing recourse is essential in getting deals done today.

- Structural changes are necessary to the CMBS markets to properly align interests so that the originators have first loss position in deals.

- Centralized underwriting via a third party is being considered, as well as forcing originators to service the actual individual loans.

One of the more interesting points regards life companies. They certainly have the cash to deploy, and while nobody could blame them for being skittish, or at least more conservative in today's environment, the real reason they may not be flooding the market with capital is because of their own recent exposure to the CMBS mess. For example, according to a report by SNL Financial, the top 20 life insurance companies holding commercial mortgage-backed securities held more than $118.67 billion by the end of last year, creating potentially higher exposure for some to CMBS delinquencies.

Hartford Life Insurance Co. held more than $9 billion in total CMBS with $6.29 billion in non-first lien A or lower status, which represented 153.1 percent of capital and reserves. Northwester Mutual held $4.93 billion of its $4.95 billion total CMBS in non-first lien A or lower, but its percentage in capital and reserves was only 36.7%. Allianz held all of its CMBS, $6.85 billion (about one tenth of its total assets), as non-first lien A or lower, 327.1% capital and reserves.

Sheesh!