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Fitch Warns CMBS Investors On Sale/Leaseback Transactions

NEW YORK, Jan 24, 2002 (BUSINESS WIRE) -- The international rating agency, Fitch, cautions commercial mortgage-backed securities (CMBS) investors who plan to invest in certain sale/leaseback financings, specifically those transactions which represent a last ditch effort of deteriorating companies to obtain financing when traditional corporate funding has become either too expensive or unavailable.

Fitch has reviewed several sale/leaseback transactions - where a company sells its commercial real estate assets and then leases them back so that the new owner can securitize the resulting pool of mortgages. Fitch is particularly watchful of companies pursuing this financing strategy that are on the brink of bankruptcy and may subsequently shut their doors. 'In these instances, CMBS investors may have to weather delinquencies and defaults because of an insufficient assessment of the risks involved,' said Danielle Violi, Senior Director, Fitch.

Fitch cautions investors to carefully review sale/leaseback transactions where investment-grade rated proceeds exceed a highly stressed value of the property. Vacant properties are typically sold at a fraction of their original value.

Other areas for investors to consider are how quickly the assets can be released and the amount of upfront reserves. When examining the details of a sale/leaseback transaction, Fitch looks closely at the characteristics of the real estate assets.

Fitch's concern is that if the assets are not easily fungible or are located in unattractive markets, the investor of CMBS bonds could hold, as collateral, empty buildings for a long period of time. 'This is especially true if the assets are specialized industrial uses; free-standing retail big boxes; mammoth office buildings located in markets with high vacancy rates; or older outdated department stores in second or third tier malls,' said Jenny Story, Managing Director, Fitch. In these instances, borrowers must be willing to put aside a reserve for debt service and retenanting costs to mitigate losses to the bondholders in case the tenant departs.

Additionally, Fitch views with caution those sale/leaseback transactions where the company creates a subsidiary to own the real estate. This situation creates great concern, because if the company, which is both the landlord and tenant, were to go out of business, there would be no funds available to pay bondholders their debt service, further emphasizing the need for upfront reserves.

Danielle Violi

Jenny Story
New York.

Media Relations:
Matt Burkhard
New York.

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