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Losses pile up in prime bonds backed by commercial real estate debt
(Bloomberg) — For the first time since the financial crisis, investors in high-grade bonds backed by commercial real estate debt are being hit with losses.
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Buyers of the AAA portion of a $308 million note secured by the mortgage on the 1740 Broadway building in midtown Manhattan recouped less than three-quarters of their original investment earlier this month after the loan was sold at a large discount. It is the first loss of its kind in the post-crisis era, according to Barclays Plc. All five groups of lower-rated lenders were eliminated.
Market watchers say the fact that the pain is hitting top holders, with crushing safeguards put in place to ensure their full repayment, is a testament to how deeply troubled US commercial real estate markets have become.
Securities backed by single mortgages and tied to older office buildings dominated by an anchor tenant — like 1740 Broadway — are especially vulnerable, they say. Some analysts are already predicting further losses as more loans are sold for a fraction of their previous value.
“Now that we’ve seen the first commercial mortgage-backed securities take a hit, other AAA securities are sure to suffer losses,” said Lea Overby, CMBS strategist at Barclays. “These losses could be a sign that the commercial real estate market is starting to bottom out.”
With about $700 billion in non-agency CMBS outstanding and another $3 billion in commercial mortgages on bank balance sheets, even a modest increase in losses could weigh on the financial system for years.
To be clear, no one foresees a repeat of 2008, when bad mortgages, particularly residential ones, nearly brought down the financial system.
However, the risk is not limited to just a handful of underperforming buildings.
The share of delinquent office loans grouped together in a common type of commercial mortgage-backed security reached 6.4% in April, the highest since June 2018, according to a Moody’s Ratings report this month.
More than that, about $52 billion, or 31%, of all office loans in commercial mortgage bonds were in distress in March, according to KBRA Analytics, up from 16% a year ago. The assessment includes both single-asset single borrower and so-called conduit CMBS, where mortgages are bundled. Some cities face more stress than others, with 75% of CMBS office loans in Chicago and 65% in Denver at risk, according to the company.
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“Values have fallen due to a combination of rising interest rates, which means increased investment, as well as decreased cash flow,” said Harold Bordwin, principal at Keen-Summit Capital Partners, which specializes in renegotiating distressed properties. “The consequence is that capital will suffer significant losses and secured debt holders will have their investment harmed.
The 1740 Broadway Building, formerly the Mutual of New York or MONY building, sits south of Columbus Circle between 55th and 56th Streets. Built in 1950, the letters formerly atop the building inspired the title of the 1968 hit “Mony Mony” by Tommy James and the Shondells.
It was purchased for $605 million by Blackstone Inc. in 2014. To help finance the deal, the company took out a $308 million mortgage, which was packaged into a CMBS and acquired by companies including Travelers Cos., Endurance American Insurance Co. others.
In 2021, L Brands, the former parent company of Victoria’s Secret and Bath & Body Works that occupied 77% of the property’s leased space, said it would exit the tower. Although Blackstone spent tens of millions of dollars to modernize the building, weak demand for office space has made it difficult to find new tenants. With no one paying rent, Blackstone abandoned the property in 2022, defaulting on the loan.
A few weeks ago, the special mortgage servicer and Blackstone agreed to sell the building to Yellowstone Real Estate for about $186 million, according to people familiar with the matter. The deal resulted in the CMBS being repaid. But with additional losses from fees and advances, only $117 million remained for bondholders. Investors in $151 million of lower-rated debt were wiped out, while those holding $158 million of debt originally rated AAA suffered a 26% loss.
“This deal was a perfect storm for an office building that relies on a single tenant for most of its rent,” John Kerschner, head of U.S. securitized products at Janus Henderson, said in an interview. “We will see more office-related titles, but this will take some time. Office leases and mortgages are very old.”
In an email response to questions, a Blackstone spokesperson said the company “discarded this property nearly three years ago. Less than 2% of our owned portfolio is made up of traditional offices in the US. This is not a new development and is a rare example in our nearly $600 billion portfolio.”
A Yellowstone representative did not respond to a request for comment.
Some industry observers say CMBS investors should expect more losses on bonds originally rated AAA in the coming months.
Barclays strategists warned in a recent report that top holders of at least four commercial mortgage-backed securities linked to shopping centers, including the former Westfield San Francisco and the Palisades Center shopping center north of New York, are likely to be hit. Office CMBS is increasingly on their radar, they wrote.
“As we are only in the early stages of office price discovery, we expect this list to expand to include multiple office deals,” Overby and Anuj Jain of Barclays said in the report.
They particularly flagged developments at 600 California St. in San Francisco, owned in part by a WeWork affiliate, and at River North Point in Chicago, owned by Blackstone. There is about $60 billion in office CMBS backed by single mortgages, according to Barclays estimates.
“Given the challenges facing the property, we have effectively canceled it in 2022,” a Blackstone spokesperson said in an email. A WeWork representative declined to comment.
Read more: Massive office tower losses reveal hidden risks around the world
In Chicago’s north suburbs, an office loan held by private equity giant Ares recently sold for just 12% of its original price. This debt has been bundled into a vehicle called a collateralized commercial real estate loan obligation, which in turn is facing unprecedented stress.
“It is very rare for AAAs to be reached, which is a more idiosyncratic case with high concentration in a single office loan,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “One must be extremely cautious as the value of office buildings is less transparent due to a lack of transactions, as are the securities linked to them.”
–With assistance from Scott Carpenter.
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The spotlight next week will shift somewhat to the Federal Reserve’s second-quarter earnings season and monetary policy. Market watchers will be treated to results from several major names, including Dow 30 components Goldman Sachs (GS), UnitedHealth (UNH), Johnson & Johnson (JNJ) and American Express (AXP), along with streaming giant Netflix (NFLX).
The Fed will still attract some attention as investors will be eager to hear from a packed lineup of central bank speakers just before the policy meeting lockout period.
In terms of the economic calendar, after fifteen days of labor market and inflation indicators, activity data will gain momentum in the form of the latest retail sales and industrial production reports.
Earnings Highlight: Monday, July 15 – Goldman Sachs (GS) and BlackRock (Black). See the full earnings calendar.
Earnings Highlight: Tuesday, July 16 – UnitedHealth (UNH), Bank of America (BAC), Progressive (PGR), Morgan Stanley (IN), PNC Financial (PNC) and JB Hunt Transport (JBHT). See the full earnings calendar.
Earnings Highlight: Wednesday, July 17 – Johnson & Johnson (JNJ), US Bancorp (USB), Morgan Children (KMI), United Airlines (UAL) and Ally Financial (ALLY). See the full earnings calendar.
Earnings Highlight: Thursday, July 18 – Netflix (NFLX), Abbott Laboratories (ABT), Black stone (BX), Domino’s pizza (ZDP) and Taiwan Semiconductor Manufacturing (TSM). See the full earnings calendar.
Earnings Highlight: Friday, July 19 – American Express (AXP), Halliburton (THANKS) and Travelers (VRT (return to recoverable value)) See the full earnings calendar.
IPO Observation: Hospital and healthcare clinic operator Ardent Health Partners (TARDT), insurance service provider Twfg (TWFG) and the biotechnology company Lirum Therapeutics (LRTX) are expected to price their IPOs and begin trading next week. The analyst quiet period ends at Rectitude (RECT) to free up analysts to publish ratings.
Police cars outside the residence of Thomas Matthew Crooks, the suspected shooter at a Trump rally on Saturday, investigate the area in Pennsylvania. Following the incident, one rally attendee was killed, two rally attendees are in critical condition and Donald Trump suffered a non-fatal gunshot wound. The shooter is dead after being shot dead by the United States Secret Service. (Photo by Kyle Mazza/Anadolu via Getty Images)
Investors will initially favor traditional safe-haven assets and may lean toward trades more closely tied to former President Donald Trump’s chances of winning the White House after he survived an assassination attempt, according to market watchers.
“There will undoubtedly be some protectionist or safe-haven flows into Asia early this morning,” said Nick Twidale, chief market analyst at ATFX Global Markets. “I suspect gold could test all-time highs, we’ll see the yen being bought and the dollar, and flows into Treasuries as well.”
Early market commentary suggested Trump’s shooting at a rally in Pennsylvania on Saturday could also prompt traders to increase his likelihood of success in the November election. His support for looser fiscal policy and higher tariffs is generally seen as likely to benefit the dollar and weaken Treasuries.
An indicator of market sentiment heading into the weekend: Bitcoin surged above $60,000, likely reflecting Trump’s pro-crypto stance.
Other assets positively linked to the so-called Trump trade include stocks of energy companies, private prisons, credit card companies and health insurers.
Traders will also be closely watching market measures of expected volatility on Monday, such as those in the tariff-sensitive Chinese yuan and Mexican peso, which have begun to price in the U.S. vote.
Trump said he was shot in the right ear after a shooting at his rally. His campaign said in a statement that he was “fine” after the incident, which prompted him to rush off the stage.
“Currencies will be the first major market on Monday in Asia to react to the weekend’s shots. There’s potential for extra volatility, and getting a clear reading could be especially difficult because liquidity will be hurt by Japan’s national holiday,” said Garfield Reynolds, Asia team leader for Bloomberg Markets Live.
Strategists had already expected a volatile run-up to the election, particularly as Democrats are still agonizing over President Joe Biden’s candidacy after his poor performance in last month’s debate raised questions about his age. Investors were also grappling with the possibility that the election could end in a drawn-out dispute or political violence.
But there is little precedent for events like those in Pennsylvania. When President Ronald Reagan was shot four decades ago, the stock market plunged before closing early. The next day, March 31, 1981, the S&P 500 rose more than 1% and benchmark 10-year Treasury yields fell 9 basis points to 13.13%, according to data compiled by Bloomberg.
Bond investors should pay particular attention as the attack is likely to boost Trump’s election chances and ultimately lead to concerns about the fiscal outlook, according to Marko Papic, chief strategist at California-based BCA Research Inc.
“The bond market must at some point become aware of President Trump’s greater chances of winning the White House than any of his rivals,” Papic wrote. “And I continue to believe that as his chances increase, so too must the likelihood of a bond market revolt.”
Kyle Rodda, senior financial markets analyst at Capital.com, said he was seeing client flows into Bitcoin and gold following the shooting.
“This news marks a turning point in American policy norms,” he said. “For markets, it means safe-haven trades, but more tilted toward non-traditional safe-havens.”
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Jio Financial share price: Should you buy this Reliance group stock on Monday ahead of Q1 FY2024 results?
Q1 2024 Results: Jio Financial Share Price will be in focus on Monday as the Reliance Group company has a fixed board meeting on July 15, 2024 to consider and approve the company’s unaudited standalone and consolidated financial results. Trust Group company informed about the Q1 2024 Results date on Wednesday last week via an exchange filing. According to stock market experts, Jio Financial Services Limited is poised to deliver impressive Q1 results for FY25 on solid operating income. They have forecast a healthy QoQ PAT for the company in Q1 FY25.
Jio Financial Services News
Speaking on the Jio Financial Services Q1 2024 results, Manish Chowdhury, Head of Research, StoxBox, said, “We believe Jio Financial Services is poised to deliver impressive results in Q1FY25 aided by its operating income, which is likely to show robust growth driven by strong investment income, which in turn should lead to healthy PAT growth on a sequential basis. Jio Financial Services continues to make strategic moves such as launching digital products and expanding its ecosystem, with a clear focus on future growth. The company has announced plans to introduce products for lending against stocks and mutual funds, leveraging Jio’s large user base, which could be a significant growth driver in the coming quarters.”
“Furthermore, with the NBFC receiving RBI approval to become a primary investment company, Jio Financial Services is well-positioned to unlock value from its investments. Overall, we expect the company to report robust numbers in the upcoming quarter,” the StoxBox expert added.
Jio Financial Stock Target Price
Speaking about the technical outlook of Jio Financial share price, Ganesh Dongre, Senior Manager, Technical Research at Anand Rathi, said, “Jio Financial Services share price is poised to make a fresh high at the ₹260 apiece level. If the stock breaks above this mark, the Reliance Group stock could make a fresh high by touching the ₹290-₹295 zone. Hence, those with Jio Finance stock in their portfolio are advised to stick to the script by keeping a stop loss at ₹205. If the stock breaks above ₹260 decisively, then one can upgrade the stop loss at ₹240 for the near-term target of ₹295.”
On the advice to new buyers regarding Jio Financial stock, Ganesh Dongre said, “New buyers are advised to wait for the breakout. Once the stock breaks above ₹260, one can buy this Reliance Group stock at the short term target of ₹295, keeping a stop loss of ₹240 apiece.”
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of Mint. Investors are advised to consult with certified experts before making any investment decisions.
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