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Pause, Skip – Won’t Be Long

Well we are back into the ‘wait and see’ markets with extremely quiet trading in both equities and interest rates. Yesterday the S&P500 moved in about a 1/2% range–closing up 1/4%. Interest rates moved in a 10 basis point range–closing flat on the day at 3.69%. I’m totally good with this lack of movement–doesn’t affect me at all–although it is boring I am fine collecting dividends and interest each month.

On Tuesday we will see the last major economic data point prior to the FOMC meeting which starts that day. The consumer price index last ran at 4.9% (year over year)–most forecasts I have seen are forecasting that May levels will be about the same. Will they raise Fed Funds or not? I think it is a coin toss–I think they want to raise–but I think they will pause for the time being. Honestly there is no harm in waiting a month–BUT there should be little doubt , with the current data, we will see a hike at the next meeting (July 25-26) absent substantial reductions in economic activity.

On Monday I posted an article on lodging REIT Park Hotels and Resorts (PK) discontinuing payment on some debt—is this specifically related to location (San Francisco) or is it the ‘canary in the coal mine’? We have seen both Brookfield and Blackstone walk away from office properties–and I think there will be lots more to come in the office sector as values are moving lower.

I didn’t look at my accounts yesterday, but plan to do so today and determine current opportunities that are available–and you know that I will be looking in the banking and insurance sectors (which includes the annuity providers).

6 thoughts on “Pause, Skip – Won’t Be Long”

  1. HI Tim – thanks for the great summary.

    The PK situation is interesting. I understand that they had $200M in Capex planned for these two buildings and are planning a special dividend to pay a good portion of this Capex to shareholders. If this is a canary in a coal mine there are several other dead canaries at the bottom of the cage by now. If I were a coal miner this would be enough dead canaries for me to get the heck out of Dodge!

    Using round numbers – the mortgage was $725M assume LTV of 60% the property value at origination was possibly $1.2B. Office CRE in SF seems to have dropped by 50%. Let’s assume the same decline for hotels – that puts the value at $600M in today’s market. Let’s assume lender recovers 70% as a result of a foreclosure proceeding and distressed sale. That puts the recovery at $420M. I would image the AAA, AA and A rated tranches of the CMBS securitization will be ok. BBB may get something. BB, B and Equity will get zeroed out.


    If this was a regional bank holding this mortgage as a whole loan this would be a $305M hit to the bank’s equity. Painful. This could result in a Friday panic/bear raids in the bank’s stock, a deposit run and a Sunday afternoon panic sale of the bank to JPM. In that scenario common, preferred, subordinated debt and sr unsecured debt will all get zeroed out while uninsured depositors get made whole. All without any due process or accounting visibility.

    Food for thought…

    1. I thought JP Morgan co-orignated this loan (along with other major lenders), so it seems unlikely that a regional bank would have huge exposure.

    2. August:
      Re PK
      The federal code on lending limits states that a national bank or savings association may not issue a loan to a single borrower for more than 15% of the institution’s capital and surplus. 1 This is the base standard and requires an institution to closely follow capital and surplus levels which are also regulated under federal law.
      This requirement is for ALL loans to one borrower

      1. More re PK/August example

        Assuming a bank loaned the max of 15%, your math of 58% recovery on PK would lead to the bank having to take a loss = 6% of its capital.

        Can’t recall any bank ever facing this large of loss to any single borrower on a real estate secured loan.

        Absolutely possible for a larger loss on multiple loans to multiple borrowers.

        Your concern that PK may be the first of many, causing an eventual run on vulnerable banks is totally germane.

      2. Thanks for the clarification on the regs Westie!

        What we are seeing here is the first wave of a more wide spread wave. While it is good that no single bank can loan that much due to regulation it is also true that there is a lot of CRE loans out there in the banking system.

  2. This gentleman is not well known over on SA and his analysis is hard to follow. I have read it once and need to read it again.
    A few here are entering the age group he is talking about and a few are his age.
    There are a lot of resources out there on the internet and I apologize I have focused on SA but that place is like living in a big city amid all the noise and rush it’s hard to focus with all that is available. It’s like standing on a major city intersection and watching the crowd pass, you will see interesting things in the world as they go by,
    I have lived through a few downturns in life and starting with the 70’s was old enough to be affected. The cycles seem to be speeding up as I get older so it’s not a bad idea to be prepared.

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