The BAN Report: PPP Update / Loan Growth? / Remote for Much of 2021? / Remote Boomtown / The Peloton Story / The 9MM Brooklyn Multi-Family Relationship-2/11/21

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PPP Update

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Through Sunday, about $101 billion in PPP loans have been approved for PPP Round 2. The SBA’s presentation had a few noteworthy highlights:

• $93 billion of the $101 billion in approvals have been to second draw loans. We suspect that this is due to the fact that most first draw eligible buyers were identified last year.

• A little over half of the loans were for depository institutions with less than $10 billion in assets.

• Average overall loan size is $78K, which is smaller than the average of last year’s program at approximately $107K.

• Top lenders so far are Chase, Bank of America and Itria Ventures, LLC. Itria Ventures is an affiliate of biz2credit.

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A hurdle so far for lenders has been error codes, which prevent banks from processing PPP loans. These error codes have been the result of efforts to root out some of the fraudulent loans originated last year.

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The Small Business Administration has announced a series of steps to address a nagging problem with error codes that Paycheck Protection Program lenders claim are needlessly delaying the approval of thousands of loans.

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In perhaps its biggest step to remedy an issue that has dogged the program for weeks, the SBA said on Wednesday that it would permit lenders to certify borrowers whose loans are impacted by validation errors to hasten their receipt of funds.

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The agency also said it would allow lenders to upload supporting documents for loans hit by the error messages.

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Relief can’t come soon enough for many PPP lenders.

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Error codes emerged as a leading bone of contention for shortly after lending resumed on Jan. 12. In the weeks immediately following the program’s relaunch, the codes interrupted the processing of as many as 30% of the loans submitted for approval.

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Attached is the new SBA procedural notice to address the issues with error codes.

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Loan Growth?

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2020 was a bad year for loan growth at banks, as loan growth shrank for the first time in a decade and just the second decline in 28 years.

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Large U.S. lenders saw their loan books shrink in 2020 for the first time in more than a decade, according to an analysis of Federal Reserve data by Jason Goldberg, a banking analyst at Barclays. The 0.5% drop was just the second decline in 28 years.

Bank of America Corp.’s loans and leases dropped by 5.7%. Citigroup Inc.’s loans dropped by 3.4% and Wells Fargo & Co.’s shrank by 7.8%. Among the biggest four banks, only JPMorgan Chase  & Co. had more loans at the end of the year than the start.

Lenders are flush with cash that they want to put to use, and executives say they are hopeful loan growth will pick up in 2021. Brisk lending typically suggests there is enough momentum in the economy to give companies and consumers the confidence to borrow. But the current weakness suggests questions remain about the vigor of the economic recovery.

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For banks, this weighed on profit. Net interest income, the spread between what banks charge borrowers and pay depositors, fell 5% across the industry last year—a consequence of shrinking loan portfolios and near-zero interest rates. It was the biggest drop in more than 80 years of record-keeping, according to research by Mike Mayo, a banking analyst at Wells Fargo.

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At the start of last year, it didn’t look like this would happen. When the pandemic first hit, big companies rushed to draw down credit lines from their banks, fearful they wouldn’t be able to raise money from investors in the bond market. The loans on bank balance sheets spiked.

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Loan books would have shrunk more if not for government support for small businesses. Banks doled out hundreds of billions of dollars in loans through the Paycheck Protection Program. Those loans have stacked up on bank balance sheets, but are slowly being whittled away as the government forgives them.

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For the regional and community banks, a disproportionate of loan growth came from PPP, much of which will have run off by the end of the year as these loans eventually get forgiven. Banks are flush with cash, but how do you prudently underwrite new loans in this environment when so many borrowers had choppy 2020s and would be struggling if it were not for unprecedented government intervention? The bond market seems to be picking up the slack.

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The average yield on U.S. junk bonds dropped below 4% for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields.

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The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96% on Monday evening, making it six straight sessions of declines.

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Yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in less-risky bond markets. Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.

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Banks are simply acting more prudently than their Wall Street brethren, who seem to be able to issue debt for any company, even those with the worst financial prospects. If AMC can issue debt despite as poor prospects as any public company, anyone can.   Chesapeake Energy, after emerging from bankruptcy recently, issued bonds this week at 5.875% with yields in the mid-4s with over $2 billion in orders before its $1 billion launch Tuesday. Perhaps, banks are better off accepting limited loan growth than chasing loan growth.

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Remote for Much of 2021?

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The long-delayed return to offices keeps getting pushed further back, and some are now seeing returns in the late summer / early fall.

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From Silicon Valley to Tennessee to Pennsylvania, high hopes that a rapid vaccine rollout in early 2021 would send millions of workers back into offices by spring have been scuttled. Many companies are pushing workplace return dates to September—and beyond—or refusing to commit to specific dates, telling employees it will be a wait-and-see remote-work year.

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The delays span industries. Qurate Retail Inc., the parent company of brands such as Ballard Designs, QVC and HSN, recently shifted its planned May return to offices in the Philadelphia area, Atlanta and other cities until September at the earliest. TechnologyAdvice, a marketing firm in Nashville, initially told employees to plan on Feb. 1 as their return date. The company then pushed the date back to August. Now, TA has decided it will begin a hybrid in-office schedule in the fall of 2021, letting workers choose whether to work remotely or come in, the company says.

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Return-to-office dates have shifted so much in the past year that some companies aren’t sharing them with employees. Shipping giant United Parcel Service Inc., based in Atlanta, and financial-services firm Fidelity Investments Inc., based in Boston, haven’t announced return dates, instead telling workers signing on from home that the companies are monitoring the coronavirus pandemic and will call workers back when it is safe.

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Nearly a year of makeshift work at home has weighed on employees, leaders say. While many companies say productivity is up, executives worry that creativity is suffering and say that burnout is on the rise. Even so, bosses struggle to say when things will change.

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Current office-occupancy rates are highest in parts of the country where large school districts have reopened, according to data from Kastle Systems, a security firm that monitors access-card swipes in more than 2,500 office buildings, from skyscrapers to suburban office campuses.

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Right now, that means Texas: In Dallas, Austin and Houston, major school districts have offered in-person learning for many months, and offices are roughly 35% full, according to Kastle. By comparison, in New York City, where schools are open part-time for in-person learning, office occupancy is less than 15%.

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While we believe that some employees function well remotely, there are others it is bad for, especially young workers who are missing out in-person training and mentorship and management teams. Management teams usually function better when they see each other on a regular basis. But, visiting a downtown office building right now is like going to the airport, so many would rather work remotely until its both safe and convenient to go to the office.

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Remote Boomtown

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As working remote continues, many workers are fleeing to smaller cities with cheaper rents and outdoor amenities. Bozeman, Montana is one of them.

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For the white-collar worker fleeing a pandemic-ravaged metropolis, Bozeman has a lot to offer. The Montana city of just under 50,000 is an hour’s drive from the award-winning Big Sky ski resort, and local businesses like the Rocking R Bar and Cactus Records radiate small-town charm. The one thing newcomers won’t be able to escape: big-city prices.

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The average rent for a 2-bedroom apartment in Bozeman hit $2,050 a month in early February, a 58% surge from a year earlier, according to rental site Zumper. The cost of a home also jumped by almost 50%, fueled in part by an influx of office types who switched to remote work when cities locked down — and ultimately decided to relocate when it became clear they wouldn’t go back any time soon. “People who can afford it are buying housing sight unseen and driving the cost of housing up,” says Amanda Diehl, a Bozeman native who returned in 2018 and now runs Sky Oro, a women-focused coworking space.

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For Bozeman residents, however, the frenzy has made their plight more acute. The cost of living is more than 20% higher than the national average, while the median income is  about 20% lower, limiting buying power in a market crowded with flush out-of-towners. More housing is coming: According to the city, a handful of new neighborhoods have recently broken ground and apartments are going up downtown. But locals are still getting squeezed out. 

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“We have such low vacancy rates, that if they lose a rental, there’s literally no other place to go,” says Heather Grenier, who runs a local nonprofit focused on housing and poverty called the Human Resources Development Council. The Bozeman boom has fueled an “incredible increase” in the local homeless population, as well as a spate of pop-up RV communities for those who’ve been displaced, according to Grenier. “This work was challenging before, but feels impossible now.”

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Of course, this is creating its own set of problems – a lack of affordable housing for one. Other places, like much of West Virginia, see an opportunity to capture from the remote trend.

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The pandemic, for all its pain, has hastened a number of trends that could aid West Virginia. It has driven a shift toward telehealth, a vital tool in rural communities. It has pushed more consumers into outdoor recreation, a market West Virginia’s scenic gorges and mountain trails are primed to capture. It has boosted political will in the state to prioritize broadband. And the pandemic has sped up a move toward remote work to parts of the country with a more affordable cost of living.

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This last trend, which is tied to the other three, could have broad consequences for how states think about economic development. If more workers can live anywhere, states don’t have to throw tax breaks at companies to attract them. They can try to attract workers directly.

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“Making a place a good place to live becomes much more important now,” said Adam Ozimek, the chief economist at the freelance platform Upwork. “That’s also a much healthier type of competition than who’s going to give the Bass Pro outlet the biggest tax cut.”

Many people grow up in rural communities and are forced to leave to find good jobs in larger cities. If the remote work trend becomes a permanent phenomenon, it does open up the appeal of affordable places with good quality of life and abundant outdoor recreation. Due to Senator Manchin’s status as the key swing vote in a 50/50 Senate, states like West Virginia could see huge federal investments in broadband, which allows these communities to compete more effectively for remote workers.

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The Peloton Story

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Fortune had a great story on Peloton’s rapid ascent, as they interviewed four of their five cofounders. A key takeaway is just how difficult it can be to raise capital for a start-up.

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Foley: This is important for the founder story. I had a vision and recruited these guys. Within a couple months, I was no longer involved in creating Peloton as you know it. I thought of something, and these guys took it, ran with it, and built it while I was gone. I was on the road for two or three years with a PowerPoint trying to raise money, very much ineffectively.

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Cortese: The noes were all stupid. They would be things like, “Oh, well, this doesn’t fit our portfolio thesis.” Or, “No, we don’t like that you have a hardware component. We only think Facebook-style software is going to work.” It’s like, “Are you guys idiots?” Most of these pieces were things that existed in the world—the bike, video streaming. Our job was to bring them together. It’s not like we were inventing a stationary bike from scratch.

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Let’s finish off with a lightning round. When was the moment you realized this thing was actually going to work?

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Cortese: 2013, Black Friday. Me, John, and others were standing in the Short Hills mall [in N.J.], which was supposed to be a pop-up store. We had the first six bikes we ever made. The only six bikes we had ever made. We put them in that store just to get it open. We were standing there when, all of a sudden, people started coming in. By the end of the day, I think we sold four to six bikes. We went out and celebrated like it was a million bikes. I remember thinking like, “Holy shit, people get it. We’ve got a business.”

Angela Duckworth wrote a great book called Grit, which I highly recommend, which talks about how grit, not talent, determines who succeeds and fails.    The Peloton founders had grit, and plowed on after several years of rejection and now are growing at an exponential rate since the pandemic.

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The 9MM Brooklyn Multi-Family Portfolio

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Clark Street Capital's Bank Asset Network ("BAN") proudly presents: "The 9MM Brooklyn Multi-Family Relationship." This exclusively offered relationship is offered for sale by one institution ("Seller"). Highlights Include:

• A total outstanding balance of $8,702,589

• The loan is secured by 1st mortgages on both a multi-family building and a mixed-use property located in Brooklyn, NY

• The vast majority of the 36 units in both properties are occupied

• The relationship is non-performing with a court-ordered sale, an in-place receiver, and bankruptcy stay relief

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Timeline:

• Sale announcement: February 4, 2021

• Due Diligence Materials Available Online: Monday, February 8, 2021

• Indicative Bid Date: Thursday, February 25, 2021

• Closing Date: Tuesday, March 9, 2021

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

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The BAN Report: Gamestop Madness / Bezos Steps Down / Death of Cities Exaggerated / Lack of Bargains for Debt Funds / Weed Legalization? / The 9MM Brooklyn Multi-Family Relationship-2/5/21

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Gamestop Madness

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The most unlikely big story of the financial markets continues to grow as Treasury Secretary Janet Yellen announced today that she is going to examine that matter. Gamestop reached as high as 483 in the past week and is now trading in the low 80s.

“We really need to make sure that our financial markets are functioning properly, efficiently and that investors are protected,” Yellen said in an interview Thursday on ABC television’s “Good Morning America” before she leads a snap meeting of top regulators later in the day. “We’re going to discuss these recent events and discuss whether or not the recent events warrant further action.”

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Thursday’s meeting puts the newly installed Treasury chief in the spotlight after populist politicians from both sides of the aisle called for investigation of recent events. While the Securities and Exchange Commission is investigating for signs of fraud behind sudden surges in stocks including GameStop Corp., others have drawn attention to trading curbs that some platforms imposed for smaller, retail investors.

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The session will give the administration the chance to demonstrate that it’s attuned to the complaints about potential manipulation after two congressional committees moved to hold hearings, yet it’s unclear what action – if any – will result.

The gathering will include the heads of the Federal Reserve – formerly led by Yellen – as well as the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Reserve Bank of New York, which serves as the central bank’s main monitor of Wall Street.

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“This is the first test for the Biden administration in the reorientation of consumer and investor protections,” said Christopher Campbell, a former assistant secretary of the Treasury for financial institutions from 2017 to 2018. The meeting telegraphs to the market that the administration “will play an active role in maintaining or upgrading consumer protections,” he said.

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One thing we can rule-out is the post-truth, twitter-led conspiracy that Robinhood was secretly doing the bidding of the Wall Street elite by shutting down the purchasing of a collection of Reddit-promoted stocks. As evidenced by a $3.4 billion capital raise in the past week, Robinhood was in over their heads with too many leveraged long bets on these stocks.

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The reality is more prosaic. Robinhood and other brokers were deluged by traders looking to invest in GameStop and other shares, often with options contracts that can increase leverage and trading risk. A clearinghouse that processes and settles trades watched the volatile trading and demanded more collateral to cope with potential losses.

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A margin call is not a conspiracy. A clearinghouse is an intermediary between buyers and sellers in a financial market. It “clears,” or finalizes, trades and makes sure the parties fulfill the contract and assets are delivered. It also mitigates risk by requiring that trades be backed by enough capital to reduce the chances that one of the trading parties goes bankrupt. This protects investors as well as brokers.

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But, it does show the investment public that doing business with unproven firms like Robinhood carries a different set of risks than an account with E-Trade, which is owned by Morgan Stanley. But, few were prepared for this, and trader Peter Borish described last week as a “plumbing issue.”

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“If I’m short options. I’m short a call, and the price starts to go up, I have to buy GameStop as it goes up to hedge the position, the more it goes up, the more I have to buy,” Borish explained. It’s a key reason behind why Robinhood was forced to restrict trades, a controversial move that unleased lawsuits and a torrent of criticism.

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Borish added: “The protection of the system is Robinhood has to get money from the customer and then put it up at the clearinghouse. If [the customer] doesn’t have it, Robinhood has to put the money up at the clearinghouse.”

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Dozens of lawsuits have already been filed against Robinhood and others. Clearly, by limiting purchases of Gamestop and others but allowing liquidations, the brokerage houses essentially tipped the scales to the bears. If the brokerage houses had better risk parameters, then this scenario would not have unfolded. No one wants to see the retail investors take it on the chin, so expect more heads to roll.

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Bezos Steps Down

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This week, Amazon CEO and the richest man in the world Jeff Bezos announced that he was stepping down as CEO, and becoming executive chairman. In recent years, Jeff has been less involved in the day-to-day decisions.

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Mr. Bezos would quip that the only time he really knew all that was going on at Amazon was in its annual budget meetings.

“He’s not super involved in the day-to-day operations,” Matt Garman, a veteran of Amazon’s cloud-computing division and top lieutenant to Mr. Jassy, said of Mr. Bezos in a 2019 interview. “I met with him more in the first 18 months than I probably have since.”

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In an interview on stage at the Economic Club of Washington, D.C., in 2018, Mr. Bezos emphasized his hands-off approach, saying he rarely took meetings before 10 a.m. or after 5 p.m., and focused on strategy over detail. “If I make, like, three good decisions a day, that’s enough,” he said.

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He had long championed innovation and reinvention, exhorting his employees to treat Amazon as a startup long after it had become a colossus.

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In that spirit of reinvention, he increasingly became fixated on projects and goals beyond Amazon. He purchased the Washington Post in 2013, and had started rocket company Blue Origin in 2000.

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Founders of the tech giants have shown a penchant for taking on ambitious new projects. Bill Gates stepped aside as Microsoft CEO after 25 years and devoted himself to reinventing philanthropy. Google co-founder Larry Page, even before stepping back from his management role in 2019, had devoted his time and wealth to side projects developing flying cars.

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Mr. Bezos has taken particular interest in Blue Origin, which competes with Space Exploration Technologies Corp., or SpaceX, run by Elon Musk —Mr. Bezos’s rival for the title of world’s wealthiest person.

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Losing Bill Gates or Steve Jobs didn’t seem to slow down Microsoft or Apple, so Amazon is unlikely to have major difficulties, especially since Jeff will continue to be involved. And, it appears he’s found someone like him in Andy Jassy.

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Tech founders are often succeeded by their opposites, typically older executives with greater managerial experience. Mr. Bezos wanted someone more like him.

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Andy Jassy, whom Mr. Bezos promoted five years ago to CEO of Amazon’s cloud business and who will take over as CEO of the company later this year, fit the bill. He started his career at Amazon in 1997, acted as Mr. Bezos’s technical assistant early on, and drove the creation of Amazon Web Services, which dominates cloud computing and accounts for the bulk of Amazon’s operating income.

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Death of Cities Exaggerated

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As Mark Twain famously said, “The reports of my death are greatly exaggerated.” COVID-19 has certainly battered large cities, but predicting their demise seems premature. According to an analysis today by Zillow, US housing prices rose at the same rate in both urban and suburban areas.

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U.S. housing prices rose at essentially the same rate in urban and suburban areas last year, jumping 8.8% and 8.7% respectively, according to an analysis by Zillow released on Thursday.

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The data complicates the narrative that workers are fleeing urban areas for the suburbs or even “Zoom towns” out West near ski resorts and national parks.

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“The for-sale housing market is experiencing a pandemic-fueled surge in both urban and suburban areas,” Zillow economist Alexandra Lee said in a statement. “Homes have become more important than ever, and buyers are eager to hit the market to find their next place to live.”

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In some more affordable metro areas -- including Kansas City, Cleveland and Cincinnati -- urban home values accelerated faster than suburban ones, according to Zillow.

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The fact that home prices are increasing faster in urban areas of smaller cities makes intuitive sense.   If someone is leaving New York or Chicago for Kansas City, the suburbs may be too much of a lifestyle change, so downtowns make more sense. Another survey by the Harris Poll and the Chicago Council on Global Affairs on the six largest metro areas showed similar appeal to urban living.

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Notably, big city residents are especially eager to stay in cities. Seven in 10 of the people we surveyed in metro New York, Los Angeles, Chicago, Houston, Phoenix and Philadelphia say they prefer to live in a big city; only 8% say they would prefer to live in the suburbs. By contrast, fewer suburbanites (61%) prefer suburban living, and three in 10 would choose a city — big or small — instead.  

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When asked specifically how their pandemic experience has affected their preferences, half of city residents say it has not changed where they prefer to live. Another 25% say the pandemic actually makes them more likely to move to another urban area. 

A better answer is this question will be answered at a later date. Many people have left the largest cities because their isn’t a whole lot to do in Manhattan right now during a pandemic. Six months from now, they may come roaring back. And, it doesn’t hurt when housing costs drop as well.

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Lack of Bargains for Debt Funds

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While distressed-debt hedge funds had a strong 2020, returning 13% on average, they are finding a limited amount of distressed credit available to purchase today.

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In March, the amount of bonds and loans trading at distressed levels in the U.S. quadrupled in less than a week to almost $1 trillion, just about reaching the 2008 peak. This week, a report from S&P Global Ratings found that the U.S. distress ratio — the proportion of speculative-grade securities that yield at least 10 percentage points above Treasuries — fell to just 5% in December, the lowest since 2014.

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Junk-rated U.S. companies issued about $52 billion of debt in January, the third-busiest month ever. According to Bloomberg’s Caleb Mutua, triple-C borrowers accounted for about 21% of those sales; energy represented almost one-third of the total. In a telling quote, David Knutson, head of credit research for the Americas at Schroder Investment Management, told Mutua: “The demand is driven by a desperate need for yield combined with hope.”

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Howard Marks, the co-founder of Oaktree Capital Group and a legendary distressed-debt buyer, put it this way in a recent memo: “In the past, bargains could be available for the picking, based on readily observable data and basic analysis. Today it seems foolish to think that such things could be found with any level of frequency.” Effectively, the world is more efficient now, he says. “The investment industry is wildly competitive, with tens of thousands of funds managing trillions of dollars … not only is information broadly available and easily accessed, but billions of dollars are spent annually on specialized data and computer systems designed to suss out and act on any discernible dislocation in the marketplace.”

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Of course, this is a function of massive stimulus and federal intervention which cannot last forever. As we are seeing in our portfolio sales, there is a favorable seller-buyer dynamic for the sellers. But, as we noted last week, if AMC can raise debt and equity, than few can argue that there isn’t plenty of liquidity in the system.

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Weed Legalization?

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Earlier this week, Senate Majority Leader Chuck Schumer and other Senators spoke out in favor of ending the federal prohibition on marijuana, thus ending the conflicts between federal and state law, and possibly opening up the banking industry services to the cannabis industry.

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Senate Majority Leader Chuck Schumer and two other Democratic senators said Monday that they will push to pass this year sweeping legislation that would end the federal prohibition on marijuana, which has been legalized to some degree by many states.

That reform also would provide so-called restorative justice for people who have been convicted of pot-related crimes, the senators said in a joint statement.

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“The War on Drugs has been a war on people — particularly people of color,” said a statement issued by Schumer, of New York, and Sens. Cory Booker, of New Jersey, and Ron Wyden, of Oregon.

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“Ending the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country,” they said.

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“But that alone is not enough. As states continue to legalize marijuana, we must also enact measures that will lift up people who were unfairly targeted in the War on Drugs.”

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The senators said they will release “a unified discussion draft on comprehensive reform” early this year and that passing the legislation will be a priority for the Senate.

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The trio also said that in addition to ending the federal pot ban and ensuring restorative justice, the legislation would “protect public health and implement responsible taxes and regulations.”

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Since the federal government as not intervened as many states have legalized marijuana in both recreational and medicinal forms, ending this inconsistency seems like a logical step. For the record, our firm does have an investment in one of the cannabis stocks, so we are obviously high on the industry (pun intended). A cyclical with the growth rate of cannabis is unprecedented as people are drinking less, smoking less, but using more cannabis.

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The 9MM Brooklyn Multi-Family Portfolio

​

Clark Street Capital's Bank Asset Network ("BAN") proudly presents: "The 9MM Brooklyn Multi-Family Relationship." This exclusively offered relationship is offered for sale by one institution ("Seller"). Highlights Include:

• A total outstanding balance of $8,702,589

• The loan is secured by 1st mortgages on both a multi-family building and a mixed-use property located in Brooklyn, NY

• The vast majority of the 36 units in both properties are occupied

• The relationship is non-performing with a court-ordered sale, an in-place receiver, and bankruptcy stay relief

​

Timeline:

• Sale announcement: February 4, 2021

• Due Diligence Materials Available Online: Monday, February 8, 2021

• Indicative Bid Date: Thursday, February 25, 2021

• Closing Date: Tuesday, March 9, 2021

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.