Liquidity Concerns, Bank M&A, and CMBS Delinquencies
Welcome to our distressed debt newsletter.
This week we take a look at LIQUIDITY. With the FED hiking rates, pulling out of Quantitative Easing (QE) and shifting into Quantitative Tightening (QT) the greater economy is just beginning to see the effects of this massive policy shift bubble to the surface. Bank M&As have come off their record highs, as well as general M&A activity worldwide, Banks are pulling back on CRE originations and corporate America begins to reduce their overhead -and employee counts- in reaction to record-breaking inflation and in anticipation of a recession.
For our Bank clients undergoing M&A, we have added value to their process and balance sheets by maximizing the value of performing and non-performing loans with certainty of execution, timing and data security. Learn more about how Xchange.Loans can add value to your Bank M&A in the featured article below.
Featured Article:
So your bank is being acquired. Many special servicing departments cringe at M&A announcements because they know that the next step will involve spending a lot of time, trouble and treasure to clear the books of distressed commercial real estate (CRE) loans.
As consolidation continues, any bank that is a potential acquisition target should take a hard look at its non-performing commercial real estate loans (CRE NPLs)—and sell them—before the deal wheels spin into motion. In particular, if you’re a midcap or community bank with assets of less than $10 billion, CRE loans likely comprise the bulk of your portfolio. When the opportunity to be acquired arises, those loans become a liability.
Top 5 Distressed Stories:
Deal values, and volumes, slumped for the first nine months of the year. Persistently high inflation, economic uncertainty, and increased borrowing costs have made it tougher for companies to stomach debt, and many have held off from moving ahead with mergers and acquisitions. Globally, the number of M&A deals fell to 39,250 from January through September, down 18% from 48,045 in 2021, Refinitiv data showed. While the slowdown is notable, it's important to remember that 2021 was a record year for M&A, capital-markets dealmaking, and private equity, which is still sitting on trillions of dollars of unused capital.
Compared to previous months, CRED iQ observed a surge of CMBS loans with non-performing maturity balloons in August 2022,” wrote Marc McDevitt, a senior managing director at CRED iQ. There were approximately $4.7 billion in outstanding loans that were characterized as non-performing maturities as of August 2022. This figure excluded debt with properties that have entered into foreclosure as well as real estate-owned (REO) assets but included loans that may have transferred to special servicing prior to scheduled maturity dates.?
Commercial lending from the biggest banks could be down as much as 50% in the latter half of this year compared to the first if the current pace holds, Eastdil Secured President Michael Van Konynenburg told Bloomberg. Projections from the Mortgage Bankers Association anticipated that commercial and multifamily lending could fall to $733B this year, an 18% drop from 2021, Bisnow has reported. Commercial lending from the biggest banks could be down as much as 50% in the latter half of this year compared to the first if the current pace holds, Eastdil Secured President Michael Van Konynenburg told Bloomberg.
The malfunctioning of the government bond market in a developed economy is an early warning of potential financial instability. The market for US Treasuries is also raising liquidity concerns. Many metrics are flashing red, just like at the onset of the COVID-19 pandemic in 2020 and in the aftermath of Lehman Brothers’ failure in 2008. After two years of quantitative easing (QE) – when central banks buy long-term bonds from the private sector and issue liquid reserves in return – central banks around the world have begun to shrink their balance sheets, and liquidity seems to have vanished in the space of just a few months.
Slightly more than half of the 50 largest MSAs tracked by CRED iQ exhibited month-over-month decreases in the percentage of distressed CRE loans within the CMBS universe. Markets with the highest level of improvements in distress included Minneapolis (-1.15%), Hartford (-0.82%) and Milwaukee (-0.80%). To be fair, these three markets are also among those with the highest percentage of distressed loans overall. Conversely, the Philadelphia market (+1.95%) had the largest percentage increase in distressed commercial real estate loans during September 2022.
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Top 5 Distressed CRE Stories:
The deal for the Hotel Felix debt highlights the financial pain still rankling hotel investors and lenders, even as travel demand picks up. New York-based Monarch Alternative Capital paid close to $29 million this month for the mortgage tied to the 228-room hotel at 111 W. Huron St., or roughly two-thirds of the loan's $44.7 million balance, according to people familiar with the deal. The loan sale comes nearly two years after a trustee overseeing the mortgage filed a foreclosure lawsuit against the hotel's owner, alleging it defaulted by failing to make loan payments early in the COVID-19 pandemic.
A venture of Chicago-based hotel investors Oxford Hotels & Resorts and Gettys Group took out the original $47 million loan at the time, when the property was appraised at $68.6 million, according to Bloomberg data tied to the CMBS loan. The pandemic reduced the property's appraised value to just $23.5 million in July 2020 as travel demand was sapped. That inched up to $24.1 million, according to a December 2021 appraisal, and the property was most recently appraised at $28.2 million in August, Bloomberg loan data shows. "Despite several years attempting to create solutions to overcome (pandemic-related) challenges at this hotel, such as identifying a social services agency to occupy the hotel as we did at many other hotels, the lender would not agree to any of our proposals," the August statement said. "As such, we and our partners, reluctantly but voluntarily, agreed to an amicable resolution with the lender."
After eight years, a developer’s quest to redevelop a Bowery flophouse appears to be all flop and no house. David Paz’s Omnia Group has spent most of the last decade converting the old brick tenement building at 225 Bowery into a niche hotel on Manhattan’s fast-gentrifying Lower East Side. But after weathering a series of starts and stops — including operating the hotel as a homeless shelter during the pandemic — Omnia has been slapped with a $10.4 million judgment in a dispute with its former managing partner, and one of its lenders is moving to foreclose on the property. Bank Hapoalim declared the loan in default last October, and in April it filed to foreclose on the hotel and appoint a receiver. Omnia moved to dismiss the suit based on a technicality in the filing. The suit has not yet been resolved, and attorneys for neither side returned requests for comment.
The Stockton Golf & Country Club has entered foreclosure after defaulting on $8.2 million in outstanding debt. "The doors aren't going to close or anything," the club's general manager, Rick Schultz, said Tuesday. "Nothing's changing in the club on the front side." A public auction is scheduled for Oct. 17, according to a legal notice published in The Record on Tuesday, Oct. 11. The impending sale of the waterfront property at 3800 W. Country Club Boulevard stems from loans the club took out with the Bank of Stockton to build the clubhouse, Schultz said. The organization's unpaid debt is backed by the club property, including a 44,000-square-foot clubhouse, which was unveiled in 2006. The club, which was founded in 1914 as one of only 12 golf courses in California according to its website, entered discussions with the bank after the business took a downturn during COVID-19, according to Schultz.
"New York City’s favorite upscale event location worked out a deal to save its bacon (crostinis), just in time for the holiday season. The $52.1 million commercial mortgage-backed securities (CMBS) loan backing two Cipriani locations in Manhattan has secured a modification, according to a Wednesday alert issued by Trepp. The workout pivot comes in the nick of time, saving the posh locations from near-foreclosure."
Nearly 6,000 mortgage borrowers in Erie County have received a pre-foreclosure notice in the past 12 months, and nearly 700 are now facing the start of formal foreclosure proceedings in court, as lenders catch up on loan defaults and property seizures that were delayed by the Covid-19 pandemic, according to the Erie County Clerk's office.
Nearly 6,000 mortgage borrowers in Erie County have received a pre-foreclosure notice in the past 12 months, and nearly 700 are now facing the start of formal foreclosure proceedings in court, as lenders catch up on loan defaults and property seizures that were delayed by the Covid-19 pandemic, according to the Erie County Clerk's office.
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Michael Jimenez is a CRE Finance and NPL expert with 15+ years of experience, as well as the Founder and CXO of Xchange.Loans.
Xchange.Loans is a secure loan sale marketplace where CRE lenders can Buy. Sell. Value. commercial loans and NPLs with NO seller fees.