June 22, 2010Client Alert

Michael Best Closes One of the First Collateralized Mortgage Backed Security Deals in Nearly Two Years

In these times of frozen financial markets borrowers are facing an unprecedented combination of depressed real estate values, undercapitalized banks and relentless regulatory scrutiny on real estate loans.

Despite this environment, Michael Best & Friedrich LLP was able to assist one of its clients in securing key financing. On June 10, 2010, JP Morgan Chase received a AAA rating from Moody’s and Fitch on $608 million of a $716 million Collateralized Mortgage Back Security (“CMBS”). This $716 million CMBS financing is one of the first in nearly two years and is backed by 36 commercial mortgage loans secured by 96 properties located in 31 states. Michael Best’s client owns six of the properties and borrowed $31 million of the $716 million CMBS issue. This loan to Michael Best’s client, which is at a fixed rate for five years, provides the client with the capacity to thrive in the current real estate market.

CMBS financings (or its predecessor known as “Collateralized Mortgage Obligations”) have been a financing technique since the mid-1980s but have not been available for the past few years due to the frozen financial markets. In a CMBS financing, the issuer of the CMBS aggregates a number of loans (for example, mortgage loans in the $10 million to $50 million range) and then issues public debt securities where the publicly issued debt securities are secured by the underlying mortgage loans. Often, the issuer will take the regular principal and interest payments made by borrowers on the mortgage loans and separate them into different payment streams, creating several bonds that repay invested capital at different rates.

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