Fitch: RAS's Toxic Taberna CDOs Getting Even More Toxic
Man, what I wouldn't give to be a fly on the wall at dinner time in the Cohen house. Betsy and her husband, whom I shall refer to as Laius for purposes of these frivolous first two paragraphs, were a pretty conservative couple in the City of Brotherly Love. They were content to sally forth up and down the Schuykill, closing bread and butter 80/20 real estate deals. But Daniel's Ophelia drove him into a megalomaniacal oedipus complex, and boy did it make him crazy, that Daniel. I'm just not sure if he was simply crazy, or crazy like a fox.
He founded the eponymous bank, Cohen Brothers, then started Taberna Capital, which subsequently became Taberna Realty Finance Trust, a publicly traded REIT. After three years of furiously issuing CDOs for the Cohen menagerie (RAS, Taberna, yet to be born AFN, etc.), Ophelia-crazy Daniel hired Chris Ricciardi from Merrill Lynch in 2006 (the latter day dark star CDO genius). Ricciardi was a Managing Director in Merrill's Global Structured Credit Group, and it was he and Merrill Lynch that had grown wealthy structuring, pricing and selling hundreds of billions in ultimately toxic CDOs, using Cohen Brothers to manage many of them. This also made crazy Daniel quite wealthy along the way.
I hope he didn't put it all in one account at IndyMac
Then, at the height of the bubble in 2006, the two of them cooked up an evil brew with Taberna Realty Finance as one of the main ingredients. They merged Taberna with RAS, ultimately saddling RAS with Taberna's acidic CDO equity.
Do you think they knew something we public shareholders didn't?
Taberna, which is now a rusted hulk of itself a mere two years later, continues to haunt the duo.
Assuming they have a conscience.
And undoubtedly, Betsy and Laius got the last word, or so it would seem. Unfortunately, RAS shareholders are left with the residue, after paying a 2006 premium for it.
Speculation and frivolity aside, Fitch announced last week that is had placed thirty-one classes from six Taberna collateralized debt obligations on "Rating Watch Negative". Four of the transactions -- Taberna Preferred Funding II, II, IV, and V -- are static CDOs, and the other two -- Taberna Preferred Funding VI and VII -- are managed CDOs.
The ratings action seems reasonable - maybe even overdue - given that the majority of the transactions are supported by portfolios of trust preferred securities issued to local and regional banks (see "The Trouble With TruPs"). The rest of the portfolio consists of subordinated debt issued by subsidiaries of real estate investment trusts, real estate operating companies, homebuilders, and specialty finance companies, as well as commercial mortgage-backed securities and, in a very few cases, senior debt securities or commercial real estate loans.
Fitch attributed its rating actions to "heightened concern related to continued negative portfolio credit migration, as well as additional default activity."
Earth shattering? Hardly. In fact, it barely qualifies as news and I'm practically embarrassed to post it for y'all. But Fitch did it, and now you know it. REITwrecks has your back!
Disclosure: Long RAS at the time of this writing
Labels: RAS
posted by RW at
11:37 PM
2 Comments:
Great article on RAIT -- it's hard to monitor the credit agencies' magic wand on a daily basis. What do you think about the idea of RAIT repurchasing the senior tranches of the Taberna debt for cents on the dollar. Kicks out taxable gains on the debt extinguishment and provides RAIT with a potentially better return on investment than most of its current investing opportunities. Reduces leverage without asset sales or a dilutive equity issuance as well.
Thanks, I'm glad you're reading. I saw your great article on GKKs buyback (and linked to it in a different but related article here), and I think the idea makes a lot of sense, especially if, as GKK said in the conf call, they are picking up yields in the "high teens to low twenties".
They also said they were cherry picking though, and in order to get those yields the debt has to be supported by good assets, so you would certainly need to do that. And the accounting benefits are really "magic". As an aside, GKK also has some potential upside with those reinvestment provisions in their CDOs.
With respect to Taberna, I think you would also want to look through those deals to see if they could be "cherry picked", but I don't know if it would work. I like the fact that GKKs assets are almost all commericial, with the exception of that horrible Suncal deal. Taberna I think is the exact opposite: mostly residential and (yuck!) Trups. If so, those CDOs probably won't make a great investment for RAS.
It is interesting to read the press coming out on Merrill's huge CDO sale though. Believe it or not, some analysts are now criticizing it because Merrill has permanently given up all the "upside" in the deals! In this market, you just can't catch a break, even during the intermission!
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