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Quarterly Reviews
REFG Valuation Group - Quarterly Real Estate Commentary
(PDF, 28.63 KB)
May 13, 2009
Real estate markets continue to adjust to a recessionary economy that began the end of 2007. With a 6.3 percent decline in 4thQ GDP, the economy has stretched into the longest recession since 1933. Labor markets continue to be stressed with the recession costing over 5.1 million jobs and economists forecasting that the current unemployment rate of 8.5% (a 25 yr high) will rise to 10% by the end of 2009. The Conference Board Leading Economic Index (LEI) for the U.S., a private-sector’s measure of future economic activity, decreased 0.3 percent in March, and the index has not risen in the past nine months. The anticipation of further declines in GDP, jobs and leading indicators continues to add uncertainty to the real estate markets.
Real Estate - MarketView
(PDF, 645.15 KB)
January 06, 2009
Severe credit and economic stress in the U.S. markets has not left the real estate markets untouched. Property fundamentals and values have deteriorated as economic demand for commercial space has diminished and investor confidence is shaken. With significantly fewer transactions occurring in the market it becomes more difficult to measure the impact on property values as sellers and buyers struggle to find a middle ground with a widening gap in bid-ask prices. Values have decreased from historical highs as capitalization rates have been driven up by more conservative cash flow expectations and investor uncertainty. Almost without exception all property types and all regions have been negatively impacted.
Leveraged Finance Market Overview and Commentary
(PDF, 62.58 KB)
December 31, 2008,
Thomas
McDonnell
The U.S. leveraged loan market remained volatile in 4Q08, as economic news and developments continued to weigh on all capital markets. The return on the Credit Suisse Leveraged Loan Index (“CSLLI”) in 4Q08 was (22.93)%, which dragged the annual return for 2008 to (28.75)%. The biggest movements came at the beginning of the quarter when the index returned (13.03)% in October, the largest single month loss since the inception of the index. The negative tone continued for the remainder of the quarter as returns for November and December were (7.89%) and (3.78%), respectively.
Fixed Income Overview and Commentary
(PDF, 67.6 KB)
December 31, 2008,
David
L.
Nagle
Reality appears to have set in during the fourth quarter of 2008. Financial markets reacted violently to the fallout from the death of Lehman Brothers, near deaths of other financial institutions and the economic shock waves from the unfolding credit crunch. In fact, it would be hard to overstate the number and/or magnitude of “unprecedented” events witnessed in the past thirteen weeks, let alone the past year. All the while, despite aggressive monetary easing and massive direct government support for financial markets and various institutions, investors’ outlooks darkened amid a breathtakingly sharp deceleration in global economic activity.
CDO Market Overview and Commentary
(PDF, 76.31 KB)
December 31, 2008,
Jeff
T.
Prince
The Technical pressures have given way to fundamental concerns as the primary driver of the credit markets. For most of 2008, it seemed that the corporate credit markets were oversold for technical reasons such as Total Rate of Return (TRS) unwinds and market value CLO liquidations. Now, at the start of 2009, we are seeing the direct impact of global financial crisis on credit performance. The leveraged loan default rate jumped to 3.7% at 2008 year end according to S&P’s Leveraged Commentary and Data and, if forecasts prove correct, we may see default rates near 10% by year-end 2009. Some may argue even that is optimistic.
Babson Staff Letters
The Babson Capital Staff Letter - 1st Quarter 2009
(PDF, 1280.89 KB)
May 14, 2009
With the year that will be remembered as that of the Credit Crunch behind us, the first quarter of 2009 emerged with much change and hence hope for the markets. It was a quarter of aggressive government policy. March was the key month when policy makers either announced stimulus plans or appeared publicly almost on a daily basis over a period of two weeks that marked the turn of the equity markets. Key policy announcements included the Federal Reserve’s program to buy over $1 trillion in various treasury and agencies bonds, the launching of the TALF (Term Asset-Backed Securities Loan Facility) and the Treasury’s announcement of the public/private plan to buy toxic assets.
A Retrospective on Five Essential Truths
(PDF, 70.59 KB)
April 14, 2006
Over the years, the Babson Staff Letter has provided readers with a window into the expertise and core values of our investment staff, offering common sense and straight-forward perspectives available in few other places. The Babson Staff Letter has been a tangible expression of the practical philosophy and "do-your-homework" approach to investing that this firm has long practiced. As capital markets and investment management progressed, from investing in stocks for dividends to investing for growth, and from investing for individuals to investing to address the complex needs of institutions, Babson Capital has changed. So too has the Babson Staff Letter.
Avoiding Investment Short Cuts and Bias Traps
(PDF, 68.85 KB)
November 05, 2005
"The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people full of doubts." — Bertrand Russell. Just why people make mistakes when choosing between courses of action has been the life work of Harvard Business School Professor Max Bazerman. Relevant to Staff Letter readers, he even includes a chapter on errors investors are prone to make. In this Staff Letter we examine a few of the theories Dr. Bazerman highlights.
The New York Stock Exchange – Part II
(PDF, 102.56 KB)
August 12, 2005,
Benjamin
F.
Sylvester
On the occasion of the New York Stock Exchange's decision to merge with Archipelago, an electronic-trading market rival, we decided to look at the NYSE itself to see how its changes reflect the evolution of the U.S. capital markets. In part 1 of this Staff Letter (June 10), we looked at the NYSE's early roots and development up through the Crash and Great Depression. Here we continue the tale up to the present day.
Co-Investing: A Strategy For Sharing Real Estate Risk and Returns
(PDF, 63.8 KB)
July 08, 2005,
Jeffrey
J.
Williams
In the last ten years another kind of real estate transaction called co-investment, where real estate mortgages are shared privately among two or more portfolio lenders, such as insurance companies and pension funds, has accounted for as much as $35 billion in transaction value. Although this level is small relative to the nearly $650 billion in commercial mortgage-backed securities (CMBS) issued over the same time, it is still meaningful and is having a steadily increasing influence on the real estate lending marketplace. This Staff Letter focuses on the unique characteristics of co-investing: who participates in these deals, what these investors end up owning and where, and how co-investment transactions are structured.
The New York Stock Exchange: Evolution Through Revolution — Part One
(PDF, 70.52 KB)
June 10, 2005,
Benjamin
F.
Sylvester
The venerable New York Stock Exchange (NYSE) and its celebrated trading floors are in for some significant change. For starters, this quintessential symbol of capitalism will soon likely merge with a former rival electronic-trading market and in the process become publicly traded like the very stocks swapped through the Exchange's storied open-outcry auctions.
Portable Alpha — Taking Returns With You
(PDF, 75.58 KB)
April 29, 2005,
Edward
Y.
Kung
Portable Alpha — it sounds like the latest competitor for Apple Computer's iPod digital music player or Research in Motion's BlackBerry handheld communications device. But far from being another gizmo for today's executive road warrior to carry around, portable alpha is an emerging strategy for institutional (and other sophisticated and generally tax-exempt) investors to capture additional return.
Other Babson Capital Research
TALF 101
(PDF, 463.45 KB)
June 26, 2009
This white paper briefly explains what the TALF program is and why it was started. It outlines the changes it has undergone since inception, and analyzes the program’s impact on the market. It concludes that the TALF program has been successful as ABS issuance has restarted, and ABS and CMBS spreads have narrowed from the peaks of earlier this year. It leaves us with some doubt as to the future of CMBS within TALF and suggests that RMBS may not be added to the program after all.
The Opportunity in Senior CLO Notes
(PDF, 519.54 KB)
June 26, 2009
In this research note, we explore the opportunity in senior CLO notes through a series of questions ■ What are CLOs and how do they work? ■ What makes AAA investors senior? ■ How wide are CLO spreads and why? ■ What have the rating agencies done? ■ How does credit deterioration affect CLO paper? ■ If default rates spike, how will it impact AAA paper? ■ How does AAA CLO paper compare with other AAA securitized paper?
Cap Rates and Real Estate Value Cycles: A Historical Perspective with a Look to the Future
(PDF, 1711.05 KB)
June 26, 2009
Capitalization or “cap” rates play a central role in real estate investment, financing and valuation decisions. Average market-wide cap rates are widely quoted and followed as a gauge of current real estate investment market conditions. Cap rates received increasing attention in both industry and academic circles over the past decade, as real estate established itself as a mainstream asset class that became more integrated with broader capital markets, on both the debt and equity sides. The resulting surge of capital into the real estate sector over the last decade helped drive property values to historical highs and cap rates to new lows
The Energy Industry: Boost or Bane?
(PDF, 272.7 KB)
April 27, 2009,
Scott
Ferguson
In the current economy, it is difficult to find items with a shorter shelf life than an economic forecast. A good example is the assumption for much of 2008 that the major Texas metropolitan areas would be brighter spots in an otherwise dismal scenario, but Houston in particular, with a then-robust energy-dependent economy, would outperform the national economy. However, in the last few months of 2008 oil prices reacted to weakened demand by posting unprecedented drops. As we move through 2009, the question arises: Will Houston (and other markets with a strong local energy presence) find the local energy economy a curse and not a blessing?
Direct Capitalization, Discounted Cash Flow Analysis and Their Relationship
(PDF, 248.26 KB)
March 11, 2009,
Joseph
Iadarola
Jeffrey
J.
Williams
Diane
Norton
The valuation of income-producing property places significant emphasis on the Income Approach. This approach is predicated on the theory of anticipation which is based upon “the perception that value is created by the expectation of benefits to be derived in the future.”1 Therefore, value is based primarily on the expectation of the quality, quantity, duration, and direction (positive or negative) of these future benefits as reflected in net operating income or cash flow.
CDO Manager of the Year
(PDF, 243.38 KB)
April 01, 2005
Read Risk Magazine's article on Babson Capital - Winner of their award "CDO Manager of the Year".
Bank Loan Report - Babson's Upbeat About 2005 Euro Market
(PDF, 68.35 KB)
January 31, 2005
The loan team at Babson Capital Management LLC has seen some major changes over the past year - changes that vice chairman, head of corporate securities, Roger Crandall, believes will further boost the firm's growing loan business in both the US and abroad.