In a report released today, Deutsche Bank Securities analysts examined the impact of Eastman Kodak Co.’s (Kodak) bankruptcy on the Hollywood and Highland loan in WFRBS 2011-C2.
This is the pool's biggest loan, equivalent to 13%, and was in the news recently because of the revenue related to the Kodak Theatre's naming rights.
Kodak has a 20-year agreement for the naming rights that was part of the loan's underwritten revenue, However, because of Kodak’s recent bankruptcy, the bankruptcy court terminated the agreement.
Deutsche analysts looked at the loan given the new data. They said that the loan does not appear as good as it did a year previous when it was securitized. However, it is still within the bounds of acceptable performance.
They emphasized that the fact pattern on this loan’s history has more general lessons for CMBS buyers, specifically given the current origination market.
"The old real estate adage location, location, location holds true yet again," Deutsche analysts wrote in the report released today. "With a strong sponsor, a great location, brand name tenants and substantial investment in the property, there is not much to worry about even given the loss of some tenants and the Kodak agreement termination."
They added that the recent market activity on the related WFRBS 2011-C2 bonds confirms it. Two months ago or before the Kodak news happened, the LCF bond covered at +140 and midmarket indications on the bond yesterday were +132.
More generally, analysts stated that the loan demonstrated the embedded credit enhancement available in pools that have above-average quality properties.
Unfortunately, they stated that considering the current state of the origination market, these pools will become rarer versus the 2010-2011 production. Given these factors, analysts expect the bonds from pools originated over this time period will end up trading at a premium to transactions that were originated in 2012 and beyond.
