• GB Davis

2q Bank Earnings, U.S. CMBS Nightmare, and Deterioration in Global Shipping - 7/8/20

On July 7, 2020, Moody’s Investors Services slashed its Global EBITDA estimates for the Shipping industry in a research note, “we now expect the aggregate EBITDA of rated shipping companies to fall by around 16%-18% in 2020, widening from our previous projection of a drop of around 6%-10%,” underscoring global economic weakness. Moody’s is skeptical in regard to an uptick in the Baltic Dry Index (BDI) off lows; and, finds that tanker rate stabilization is being driven by high demand for “floating storage” (hurry-up-and-wait). Moody’s maintains its Negative Outlook for the Industry, believing that EBITDA of its global shipping universe will decline significantly “over the next 12-18 months.” Moody’s renewed pessimism (here-and-now) is more pessimistic view is “largely based on the gloomier outlook for the global economy in 2020 and the likelihood that its recovery will be long and bumpy.” Moody’s expects “global trade to contract by around 11.9% this year. Key reasons are the coronavirus-induced drop in consumer demand and investment in the second quarter, and disruptions along supply chains and shipping routes resulting from coronavirus lockdowns. Consumer demand will recover only gradually in the second half of the year. In addition, the pandemic will complicate and possibly delay US-China “phase two” trade negotiations, and UK-EU and US-EU negotiations.” “In the longer term, a move to more regional supply chains, which was already occurring in the auto and electronics sectors, could also accelerate, as well as further shifts toward domestic production of critical goods, such as pharmaceuticals and food. This is likely to lead to the reconfiguration of a number of shipping routes, although the ultimate effect on tonne-miles, a key revenue driver, is uncertain at this point. The crisis has also laid bare the vulnerabilities of just-in-time supply chain management and could prompt companies to consider moving supply chains closer to their final markets and building redundancies.” THIS WILL CLEARLY BE AN AGENDA ITEM WHEN AMLO MEETS WITH TRUMP THIS WEEK.


“Second-quarter profit declined as coronavirus outbreak took a toll We expect many banks to report sharp declines in earnings for the second quarter of 2020 compared with the same period in 2019, due to widespread economic disruptions from the coronavirus outbreak, coupled with the impact of the oil price collapse in March 2020, in the case of oil-producing economies. Results from bank to bank will also likely vary more than normal given the level of uncertainty over future developments related to the coronavirus and the impact this has on assumptions key to loan loss provisioning. Many banks already significantly boosted loan loss provisions in the first quarter as they braced for the fallout from the outbreak, but credit costs likely further increased in the second quarter as lockdowns and social distancing measures crippled economic activity, weakening many borrowers’ debt-servicing capacity. Some banks are also likely to report sharper increases in problem loan (PL) ratios for the second quarter than for the previous three months, as borrowers' ability to repay becomes clearer. All of the varying supportive bank and government measures as well as the coronavirus prompted regulatory guidelines on what constitutes a PL will also likely impact PL growth levels. Banks’ profitability will weaken also because monetary easing to shore up economies will lead to declines in interest income, and for some, a contraction of margins (NIM) to the extent that this cannot be offset by adjusting the pricing on liabilities.” (Moody’s, 7/8). Next week Bank Earnings in Focus: Tue (BMO): $C, $JPM, $WFC; Wed (BMO): $BK, $GS, $PNC, $USB; Th (BMO): $BAC, $MS; Fri (BMO) $RF, $STT Do note, however, per Moody’s, “Second-quarter results for many banks will be a poor or uncertain base from which to extrapolate for the remainder of 2020 and beyond, so looking beyond the headline numbers is critical to differentiate the credit impact. The analysis of banks’ assumptions for loan loss provisions, PL formation and charge-offs will be critical in an assessment of banks’ medium-term asset quality.” For this reason, alone, we (ourselves) would not make ANY pre-earnings moves on the banks and see how the market digests individual reports after earnings calls and review of the quarterly financials. YOU MAY WORK AT A BANK AND BE GOOD AT UNDERWRITING CASH FLOW – BUT YOU ARE NOT A BANK ANALYST, AND THIS IS NOT THE TIME TO TRY TO BE ONE. Also, “banks’ forward guidance on capital formation and dividend or share repurchase plans, as well as liquidity, will help us assess their credit profiles. Anticipating future regulatory guidance on capital actions such as recent share repurchase or dividend restrictions from regulatory or supervisory authorities like the European Central Bank, Bank of England or US Federal Reserve will also be critical in estimating where capital levels will trend over the coming two to three years. The credit strength of many banks will become increasingly vulnerable to the extent that the economic shock broadens and lengthens and the deterioration of second-quarter profitability and asset quality indicates medium-term pressure for at least some banks’ capital. As such, the extent and anticipated duration of any declines in capital over the next several years, stemming particularly from the inability to achieve sufficient profitability, take on particular importance in our assessment of banks’ credit profiles. While we expect to continue to place more banks on negative outlooks, we will likely change their ratings when we determine their capital will materially deteriorate without a return to pre-crisis levels in two to three years, which will, in many instances, take more time to evaluate. Conversely, if we are highly confident that a bank’s capital will broadly recover to its pre-crisis level in two to three years, we are unlikely to take any negative rating action on the bank.”

Mexico is a prominent beneficiary of remittances from the U.S. Further, Mexican resort tourism sees significant inbound traffic from U.S. tourists (52.2% of int’l plane travel). Therefore, we expect another AMLO-Trump agenda items this week to be broaching the manner in which to reinvigorate cross-border tourism flow – safely. As a U.S. Passport is required to travel to Mexico these days, discussions centered around voluntary contact tracing, quarantine, travel zones, the Mexico-AZ border closing (and similar) will all, also be expected agenda items. Moody’s,” Mexican states with a greater dependence on tourism will be hit severely by the coronavirus. The local economies of the states of Quintana Roo, Baja California Sur, Nayarit and Guerrero are those most reliant on tourism. Temporary accommodation, food and beverage services account for 24.5% (Quintana Roo), 13.3% (Baja California Sur), 12.5% (Nayarit) and 5.5% (Guerrero) of local GDP. We expect the hit to tourism from the pandemic to lead to an average loss of 3.0% of GDP in 2020 under our base case scenario1 and 4.8% under our stress scenario2 and 0.6% in 2021. Quintana Roo and Baja California Sur face downside risks as they are more reliant on international tourists and the airline industry is likely to suffer for an extended period of time due to the pandemic.”


The U.S. CMBS delinquency rate in June posted the largest single month-over-month increase since the inception of Fitch Ratings' loan delinquency index nearly 16 years ago. Loan delinquencies surged by 213 basis points (bps) in June to 3.59% from 1.46% a month earlier. New delinquencies of $10.8 billion in June significantly exceeded resolution volume of only $172 million. The current trajectory is tracking Fitch's expectation that the impact from the coronavirus pandemic will drive the delinquency rate higher over the next few months and peak between 8.25% and 8.75% by the end of third quarter 2020. Fitch has also seen a greater rate of 30-day loan delinquencies rolling to 60 days, a trend likely to continue and expects the volume in special servicing will further spike over the summer.

All property types reported substantially higher delinquency rates from the prior month. Current and previous delinquency rates by property type are as follows:

--Hotel: 11.49% (from 2.00% in May);

--Retail*: 7.86% (from 3.82%);

--Mixed Use: 4.17% (from 0.95%);

--Office: 1.92% (from 1.39%);

--Industrial: 0.67% (from 0.28%);

--Multifamily**: 0.59% (from 0.41%);

--Other: 0.93% (from 0.82%).

*The regional mall delinquency rate jumped by 585 bps to 10.31% in June from 4.46% in May due to 24 regional mall loans ($1.8 billion) becoming newly delinquent in June.

**The student housing delinquency rate rose by 104 bps to 5.47% in June from 4.43% in May due to five student housing loans ($69 million) becoming newly delinquent in June.

Loans reported as 30 days delinquent increased further to $15.7 billion (632 loans) in June from $14.6 billion (824 loans) in May. The average loan size of the 30-day loan delinquencies has grown to $25 million in June from $13 million in May. Retail and hotel loans, which Fitch views to be most vulnerable to the pandemic, comprised 49% ($7.7 billion) and 34% ($5.4 billion), respectively, of the total 30-day delinquencies. Should all of the 30-day delinquent loans become 60 days delinquent next month, it would add 323 bps to the overall delinquency rate (to 6.82%), which factors in four new Fitch-rated transactions totaling $3.3 billion that closed in June; this would also propel the hotel and retail delinquency rates above their prior Great Recession peaks to 22.41% and 16.45%, respectively, and approach closer to Fitch's projection of approximately 30% and 20%, respectively. Approximately 60% of the 30-day delinquencies in May rolled to 60 days delinquent in June, compared to 51% from April to May.

As of June 2020, approximately $21 billion (904 loans), or 4.4% of the Fitch-rated U.S. CMBS universe, was in special servicing; this represents an increase from $14.9 billion (726 loans), or 3.2% of the Fitch-rated U.S. CMBS universe in May. New transfers to special servicing totalled approximately $6.9 billion (241 loans) in June, with retail and hotel loans, combined, comprising 88% of the new special servicing transfers at $3.1 billion (76 loans) and $3.0 billion (110 loans), respectively.

By property type, the outstanding specially serviced loans/assets are as follows:

--Retail: $10.1 billion (311 loans) in special servicing; 48.1% of total in special servicing; $3.1 billion (76 loans) of new transfers in June;

--Hotel: $6.6 billion (335 loans); 31.5%; $3.0 billion (110 loans);

--Office: $2.2 billion (87 loans); 10.7%; $243 million (10 loans);

--Mixed Use: $905 million (46 loans); 4.3%; $303 million (15 loans);

--Multifamily: $658 million (46 loans); 3.1%; $104 million (eight loans);

--Industrial: $89 million (10 loans); 0.4%; $5 million (two loans);

--Other: $381 million (69 loans); 1.8%; $159 million (20 loans).

The hotel delinquency rate spiked 949 bps in June due to $4.7 billion of new delinquencies exceeding a mere $16 million of resolutions. The new hotel delinquencies include three hotel loans greater than $100 million that became 60 days delinquent in June:

--The $232 million Hammons Hotel Portfolio loan (seven hotels located in North Carolina, Tennessee, Oklahoma, Texas, Arizona, Alabama and Missouri; CGCMT 2015-GC33, GSMS 2015-GC34, CGCMT 2015-GC35 and GSMS 2015-GS1);

--The $160 million Sheraton Grand Nashville Downtown loan (Nashville, TN; CSAIL 2018-C14, WFCM 2018-C48, MSCI 2018-H4 and MSCI 2019-L2); and

--The $113.9 million Grand Beach Hotel loan (Miami Beach, FL; WFRBS 2013-C12).

The retail delinquency rate soared by 404 bps in June due to $3.9 billion of new delinquencies surpassing only $90 million of resolutions. The largest overall new delinquency last month was the $285 million 229 West 43rd Street Retail Condo loan (CD 2017-CD3, JPMDB 2017-C5, CD 2016-CD2 and CGCMT 2017-P7), which is secured by a 245,132 sf retail condominium located along West 43rd and 44th Streets in the Times Square area of Manhattan. The loan transferred to special servicing in December 2019 for imminent monetary default due to shortfalls on debt service and required reserve payments. Prior to the loan's transfer, it had been on the master servicer's watchlist for low debt service coverage ratio (DSCR) and the occurrence of multiple lease sweep periods, which triggered a cash flow sweep since December 2017. Property occupancy and cash flow have been negatively impacted by vacating tenants, tenants paying reduced rent and a tax abatement phase out.

Twenty-four regional mall loans ($1.8 billion), all of which have been previously designated Fitch Loans of Concern, became newly delinquent last month, five of which are greater than $100 million:

--The $262 million Crossgates Mall loan (Albany, NY; COMM 2012-CCRE1, COMM 2012-CCRE2 and COMM 2012-CCRE3; loan became 60 days delinquent in June; loan is sponsored by Pyramid);

--The $210 million Eastview Mall and Commons loan (Victor, NY; COMM 2012-CCRE4 and COMM 2012-CCRE5; loan became 60 days delinquent in June; loan is sponsored by Wilmorite);

--The $170 million Mall St. Matthews loan (Louisville, KY; Fitch-rated GSMS 2013-GC13 and non-Fitch-rated GSMS 2013-GC14; loan defaulted at its June 2020 maturity; loan is sponsored by Brookfield);

--The $128 million Las Catalinas Mall loan (Caguas, Puerto Rico; JPMBB 2014-C22 and JPMBB 2014-C23; loan became 60 days delinquent in June; loan is sponsored by Urban Edge Properties); and

--The $105 million Solano Mall loan (Fairfield, CA; COMM 2012-CCRE3; loan became 60 days delinquent in June; loan is sponsored by a joint venture between Starwood Capital Group Global, L.P. and the Westfield Group).

Approximately 21% of the regional mall/outlet loans ($6 billion) in the Fitch-rated U.S. CMBS universe are now in special servicing, which includes 18 additional regional mall/outlet loans ($2 billion) that newly transferred to special servicing in June.

Sizeable new regional mall/outlet loan transfers to special servicing in June include:

--The $274.5 million Green Acres Mall loan (Valley Stream, NY; COMM 2013-GAM; loan remains current as of June);

--The $256.8 million Gurnee Mills loan (Gurnee, IL; WFCM 2016-C36, CSAIL 2016-C7, CSMC 2016-NXSR, WFCM 2016-LC25, CD 2017-CD5 and CD 2017-CD6; loan was 30 days delinquent in June);

--$174.1 million Deptford Mall loan (Deptford, NJ; GSMS 2013-G1; loan remains current as of June);

--$154.6 million Wolfchase Galleria (Memphis, TN; BBCMS 2017-C1, MSC 2016-UB12, MSBAM 2016-C32 and CSMC 2016-NXSR; loan was 30 days delinquent in June);

--$150 million The Mall of New Hampshire (Manchester, NH; BACM 2015-UBS7 and CSAIL 2015-C3; loan was 30 days delinquent in June).

The mixed use delinquency rate increased 322 bps due to $1.2 billion of new delinquencies. The largest mixed use delinquencies, both of which became 60 days delinquent in June, were the $150 million Headquarters Plaza (Morristown, NJ; CD 2017-CD6, WFCM 2017-C41 and CCUBS 2017-C1) and the $140 million Crocker Park Phase One & Two (Westlake, OH; CGCMT 2016-C2, JPMCC 2016-C3 and CGCMT 2016-P5) loans. The Headquarters Plaza loan is secured by a mixed-use office, hotel, and retail complex featuring three office towers, restaurants, a 10-Plex AMC Cinema, an upscale health club and the 256-key Hyatt Regency Morristown. The Crocker Park Phase One & Two loan is secured by a mixed-use property that is predominately retail, with tenants including Dick's Sporting Goods, Fitness & Sport Club, Barnes & Noble and a 16-screen Regal cinema, and features an office component.

By transaction type, delinquency rates were as follows:

--Conduit: 5.23% (814 loans, $17 billion); from 2.10% in May;

--Freddie Mac: 0.08% (five loans, $88 million); 0.03%;

--Large Loan Floaters: 2.06% (three loans, $76 million); 2.05%;

--Single Family Rental: 3.01% (60 loans, $68 million); 2.07%;

--Small Balance: 2.40% (three loans, $2 million); 2.07%;

--Single Asset/Single Borrower: no delinquencies.

By vintage, delinquency rates were as follows:

--CMBS 2.0 (2010 - 2020 vintages): 2.97% (750 loans; $14 billion); from 0.74% in May;

--2010: 0.90% (two loans; $18.6 million); from 0.83% in May;

--2011: 3.43% (13 loans; $420 million); 0.79%;

--2012: 5.62% (40 loans; $1.5 billion); 1.07%;

--2013: 2.86% (63 loans; $1.2 billion); 1.00%;

--2014: 4.72% (101 loans; $1.9 billion); 2.39%;

--2015: 4.05% (138 loans; $2.2 billion); 1.26%;

--2016: 3.56% (149 loans; $2.1 billion); 0.88%;

--2017: 2.83% (88 loans; $1.9 billion); 0.32%;

--2018: 2.56% (96 loans; $1.6 billion); 0.22%;

--2019: 1.33% (53 loans; $973 million); 0.10%;

--2020: 0.62% (seven loans; $205 million); 0.04%.

--CMBS 1.0 (pre-2009 vintages): 46.33% (135 loans; $3.2 billion), 45.15%.

The Fitch-rated U.S. CMBS 2.0 universe totalled over $472.0 billion as of June 2020, compared with $6.9 billion for its 1.0 universe.

Fitch's delinquency index includes 885 loans totalling $17.2 billion that are currently at least 60 days delinquent, in foreclosure or REO or considered non-performing matured out of Fitch's outstanding rated U.S. CMBS universe of 24,733 loans comprising $479.0 billion. The index excludes wireless tower, outdoor advertising, certain other non-traditional transactions and Canadian transactions. The universe (denominator) includes $32.0 billion in defeased loans in June, down slightly from the $32.5 billion in May. The index (numerator) excludes loans that are 30 to 59 days delinquent. Newly issued CMBS transactions are seasoned for one month before being included in the rated universe figure (i.e. the index denominator). Fitch-rated new issuance volume of $8.8 billion from 10 transactions that closed in May tripled portfolio runoff of $2.9 billion.


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