The BAN Report: Traveling Like Its 2019 / Credit Weakens / FHLB Revamp / 2008 Under Trial / The 4MM Thundering Herd Resi Portfolio / The 40MM NNN Loan Portfolio

Traveling Like Its 2019

For the time since the pandemic, airline travel returned to 2019 levels. 

Labor Day marked the first holiday travel weekend to exceed 2019 counts of airport travelers since the start of the COVID-19 pandemic, the Transportation Security Administration said.

TSA checkpoints screened 8.76 million people between Friday and Monday — 2% higher than the number recorded on Labor Day weekend in 2019, TSA spokeswoman Lisa Farbstein said on Twitter.

The American Automobile Association had forecast that one-third of Americans would travel by road, rail, or plane over the holiday weekend.

COVID-19 made a massive dent in air travel in the US and abroad after first striking in late 2019 and early 2020.

The number of total travelers dropped below 90,000 on some days in the initial months of the pandemic crisis. Travel has since rebounded — but the number of people through checkpoints remains below pre-pandemic levels on most days, according to TSA figures.

All of this is very encouraging. From looking at the travel count numbers on the TSA site, the recover in travel seems pretty consistent.  For the travel industry to continue to recover, business travel needs to return to pre-pandemic levels.   

Business travel, however, remains about 25% to 30% below 2019 levels, according to airlines and outfits that track sales.

And it is not clear when — or if — road warriors will return to their old travel habits.

“The whole challenge for the industry is around the return of the corporate traveler, and whether he is going to come back in enough volume and frequency that is going to help these airlines,” says John Grant, an analyst with travel-data provider OAG.

The Global Business Travel Association recently predicted that corporate travel will not fully return until mid-2026, 18 months later than the trade group had previously forecast.

The small business traveler has returned, but the large corporations are still lagging in their corporate travel. It is our view that business travel must improve, as the leisure traveler may have gotten their revenge travel out of their system.

Credit Weakens

As of today, credit is strong throughout the banking system. For example, according to the Mortgage Bankers Association, mortgage credit quality has never been better due to very low percentage of loans in delinquency and/or in foreclosure. Higher rates and a slowing economy appear to be increasing the likelihood of defaults.   For example, junk bonds are seeing higher defaults. 

Defaults on so-called leveraged loans hit $6 billion in August, the highest monthly total since October 2020, when pandemic shutdowns hobbled the U.S. economy, according to Fitch Ratings. The figure represents a fraction of the sprawling loan market, which doubled over the past decade to about $1.5 trillion. But more defaults are coming, analysts say.

Interest costs for an average company with debt consisting of leveraged loans have increased sharply and will likely continue to rise into next year, according to research by Barclays PLC. The percentage of loans in default will likely rise to roughly 3.25% in mid- 2023 from about 1% now, but it could go significantly higher, said Jeff Darfus, a credit analyst at the bank. 

Data from a recent Fed survey of loan officers at top banks showed tightening lending standards that a Barclays’s model predicted could cause roughly 4.5% of the loans to be in default a year from now, he said.

Cineworld (Regal Cinemas) filed for Chapter 11 this week.

“As part of the Chapter 11 cases, Cineworld, with the expected support of its secured lenders, will seek to implement a de-leveraging transaction that will significantly reduce the group’s debt, strengthen its balance sheet and provide the financial strength and flexibility to accelerate, and capitalize on, Cineworld’s strategy in the cinema industry,” the second-largest movie theater chain explained. “The group Chapter 11 companies enter the Chapter 11 cases with commitments for an approximate $1.94 billion debtor-in-possession financing facility from existing lenders, which will help ensure Cineworld’s operations continue in the ordinary course while Cineworld implements its reorganization.”

The filing of a proposed plan of reorganization with the bankruptcy court would happen “in due course,” with the goal to emerge from Chapter 11 “as expeditiously as possible,” the firm said. “Cineworld currently anticipates emerging from Chapter 11 during the first quarter of 2023 and is confident that a comprehensive financial restructuring is in the best interests of the group and its stakeholders, taken as a whole, in the long term.”

The London-headquartered company operates the Regal cinemas in the U.S., as well as Cineworld and Picturehouse venues in the U.K. Overall, it operates 747 sites and 9,139 screens in ten countries.

Presumably, Regal will use the Chapter 11 process to shed itself of its unprofitable theaters, thus causing stress on these retail centers. The fact that the largest movie chains avoided BK throughout the pandemic is as much a sign of easy money as it is resiliency. We have now left the COVID-19 phase in which we propped up every single business and are now entering a normal phase. ‘

FHLB Revamp

Last week, the Federal Housing Finance Agency (FHFA) announced it was going to conduct a review of the entire FHLB system, a nearly $1 trillion network of government-chartered cooperatives that provide cheap funding for thousands of banks.

The Federal Housing Finance Agency said Wednesday that it would launch this fall a review of the structure and role of the home-loan banks, a 90-year-old system that has drawn scrutiny from current and former policy makers over whether its modern-day activities fully match its original mission of supporting mortgage lending.

The FHFA has yet to outline an overriding goal for its review, but it could lead to a push to expand the membership of the system to nonbank mortgage companies and real-estate investment trusts, potentially making the system more housing-focused after decades of what critics characterize as drift. It also opens up the possibility of the system serving purposes in addition to housing.

Founded during the Great Depression, the home-loan banks’ role has evolved. They were an important source of liquidity to commercial banks during the financial crisis of 2008. Since then, they have also become a supplier of cheap funding to some of the largest U.S. banks, in recent years including Wells Fargo & Co. and JPMorgan Chase & Co.

FHFA’s review will ensure the home-loan banks “remain positioned to meet the needs of today and tomorrow,” FHFA Director Sandra Thompson said.

This review could go in different directions. It could result in expanding membership to nonbank lenders, or a narrowing of its mission. Some have argued that the system does not do much to improve mortgage finance. Total borrowings stood at $937 billion as of July 31, so any changes could materially increase the funding costs for banks. Be prepared for a fight over this topic in the next several months!

2008 Under Trial

Bank of America, via their acquisition of Countrywide Financial, is going to trail with bond insurer Ambac in a $2.7 billion case, starting this month.

The trial before Manhattan Supreme Court Justice Robert Reed is expected to last nearly two months. Ambac claims Countrywide violated contracts governing 17 securitizations of home loans between 2004 and 2006 by flouting underwriting guidelines and passing on risks to the insurer. According to Ambac, Countrywide's leadership, including Chief Executive Angelo Mozilo, knew the majority of its mortgages were questionable but pushed employees to approve them as part of a goal to originate one out of every three home loans in the U.S. 

"The company had a strategy from the top down to the bottom, and the folks on the ground were implementing this strategy to originate as many loans as they could without regard to quality and get them out as quickly as they could," Carlinsky said.

But lawyers for Countrywide said Wednesday that Ambac performed its own risk analysis when it agreed to insure the bonds for $25 million a year in premiums.

"What did Ambac know about these loans? The answer is, from the get-go, everyone, including Ambac, knew the loans in these securitizations had significant payment risks," Enu Mainigi, a lawyer for Countrywide, said in opening statements.

Ambac’s market cap is $675 million, so a $2 billion plus settlement would be a game changer. The dollar amounts are so large, it appears to be a case that can’t be settled and must be decided at trial.  

The tab for Bank of America’s $4 billion purchase of Countrywide Financial in January 2008 keeps growing, making it perhaps the worst deal in the history of financial services. Bank of America has already paid out more than $50 billion to settle regulatory probes and litigation.

The 4MM Thundering Herd Resi Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $4MM Thundering Herd Resi Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $4,00,557 comprised of 40 loans

  • A weighted average coupon of 5.57%

  • Properties are located in three states, West Virginia (90%), Ohio (8%), and Kentucky (2%) with 74% of the portfolio within the Huntington-Ashland WV-KY-OH MSA

  • A weighted average maturity of 266 months (22.2 years)

  • 75% of the loans are ARMs and the remaining are fixed

  • A weighted average LTV of 60%

  • The entire portfolio is performing

Timeline:

Sale Announcement: Thursday, September 8, 2022

Due Diligence Materials Available Online: Monday, September 12, 2022

Indicative Bid Date: Thursday, September 22, 2022

Preferred Closing Date: Friday, September 30, 2022

Please click here to view the executive summary. The confidentiality agreement is in the upper left hand corner.
 

The 40MM NNN Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $40MM NNN Loan Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $39,775,197 comprised of 13 loans

  • 1st mortgages on retail buildings leased to credit tenants including Walgreens, CVS, and 7-Eleven

  • Tenant pays bank directly (“direct rent capture”)

  • Properties are located in 13 states across the South (62%), Midwest (20%), and West (18%)

  • Weighted average coupon of 4.15%

  • Low leverage with a weighted average LTV of 55% with all LTVs less than 63%

  • Weighted average seasoning of ten months and a weighted average maturity of 11.5 years; lease terms always exceed maturities

  • All loans have prepayment penalties

  • Since the program’s inception over a decade ago, the seller has never had a 30-day delinquency 

  • Potential flow relationship of $100MM annually

  • Servicing-retained (preferred) or released; seller will also entertain keeping a 10% participation interest

  • This portfolio will trade for a premium, and any bids under par are unlikely to be entertained  

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely. 

The BAN Report: The 20MM OOCRE Loan Portfolio / Intransitory / Amtrak Strike Averted / Deposits Fall / Fed Revisiting Mergers? / The 4MM Thundering Herd Resi Portfolio

The 20MM OOCRE Loan Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $20MM OOCRE Loan Portfolio” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $19,091,941 comprised of 13 loans in ten relationships

  • 86% of the portfolio is comprised of a single performing loan relationship secured by 13 franchise restaurants in multiple states, four of which include 1st mortgages on the real estate

  • Two all-or-none pools including a Restaurant pool ($16,470,903) and a Midwest pool ($2,545,343)

  • The Midwest pool is primarily secured by 1st mortgages on commercial real estate, including industrial (21%), car wash (17%), retail (17%), and restaurant (15%)

  • 98% of the portfolio is performing and 2% is sub-performing

  • The loans have a weighted average coupon of 6.15% and 96% of the loans are variable rate

  • All loans include full personal recourse

Timeline:

Sale Announcement: Thursday, September 15, 2022

Due Diligence Materials Available Online: Monday, September 19, 2022

Indicative Bid Date: Thursday, October 13, 2022

Closing Date: Thursday, November 3, 2022

Please click here to view the executive summary. The confidentiality agreement is in the upper left hand corner.

Intransitory

After a disappointing inflation report, the stock market had its worst day in over two years. Unfortunately, there is nothing transitory about inflation and it continues to persist.

U.S. consumer prices overall rose more slowly in August from a year earlier but increased sharply from the prior month after excluding volatile food and energy prices, showing that inflation pressures remained strong and stubborn.

The Labor Department on Tuesday reported its consumer-price index rose 8.3% in August from the same month a year ago, down from 8.5% in July and from 9.1% in June, which was the highest inflation rate in four decades. The CPI measures what consumers pay for goods and services.

So-called core CPI, which excludes energy and food prices, increased 6.3% in August from a year earlier, up markedly from the 5.9% rate in both June and July—a signal that broad price pressures strengthened.

On a monthly basis, the core CPI rose 0.6% in August—double July’s pace. Investors and policy makers follow core inflation closely as a reflection of broad, underlying inflation and as a predictor of future inflation.

The data suggests that inflation is tethered less to supply chain issues and Russia / Ukraine and more of a persistent problem.

Consumer Price Index data from August released on Tuesday illustrated that point. Gas prices dropped sharply last month, which many economists expected would pull overall inflation down. They also thought that recent improvements in the supply chain would moderate price increases for goods. Used car costs, a major contributor to inflation last year, are now declining.

Yet, in spite of those positive developments, quickly rising costs across a wide array of products and services helped to push prices higher on a monthly basis. Rent, furniture, meals at restaurants and visits to the dentist are all growing more expensive. Inflation climbed 8.3 percent on an annual basis and picked up by 0.1 percent from the prior month.

The data underscored that, even without extraordinary disruptions, so many products and services are now increasing in price that costs might continue ratcheting up. Core inflation, which strips out food and fuel costs to give a sense of underlying price trends, reaccelerated to 6.3 percent in August after easing to 5.9 percent in July.

“Inflation currently has a very large underlying component that is grounded in a red-hot labor market,” said Jason Furman, an economist at Harvard University. “And then, in any given month, you may get more inflation because of bad luck, like gas going up, or less because of good luck, like gas going down.”

He estimated that core inflation would continue to climb at around 4.5 percent, and rising, even if pandemic- and war-related disruptions stopped pushing prices higher.

There also seems to be some regional differences in inflation. Phoenix, for example, is seeing twice the level of inflation as San Francisco.

Inflation soared to 13% in Phoenix last month, a record for any US city in data going back 20 years and more than twice as high as San Francisco.

Other cities across the South and Southwest saw double-digit increases in consumer prices, with the Atlanta metropolitan area posting annual inflation of 11.7% and Miami reaching 10.7%, according to Bureau of Labor Statistics data.

Overall inflation was resurgent in August, dashing hopes of a nascent slowdown even as gasoline prices declined. But the national average of 8.3% masks growing disparities among cities, making the Federal Reserve’s fight against inflation more complicated.

In San Francisco, consumer prices rose 5.7% in the 12 months through August, while in Los Angeles the rate was 7.6%. In the New York city metro area, prices rose 6.6%, a slight acceleration from 6.5% in July.

The Fed is determined to combat inflation. Nomura is predicting and calling for a full one percent increase in interest rates next week – the largest increase in over 40 years. Eventually, these rate increases will work, and demand will drop, but avoiding an undisputed recession may be impossible.

Amtrak Strike Averted

The White House announced today a tentative agreement to avoid an Amtrak strike.    Amtrak was scheduled to suspend all long-distance travel service today before this agreement. 

President Biden said in a statement that the tentative deal “is an important win for our economy and the American people.” He credited the unions and rail companies “for negotiating in good faith and reaching a tentative agreement that will keep our critical rail system working and avoid disruption of our economy.”

The Biden administration had been holding talks with representatives from both sides to avoid transport disruptions that could have snarled supply chains, putting new pressure on prices when inflation has been hovering near four-decade highs.

Ahead of the Friday deadline, passenger-rail provider Amtrak had said it would suspend all long-distance train services starting Thursday to avoid disruptions caused by a potential strike by freight workers. While the negotiations don’t involve Amtrak workers, Amtrak’s long-distance trains operate on freight lines, and the company said it wanted to avoid passenger disruptions in the event of a strike.

Labor Secretary Marty Walsh, who had been meeting with the representatives, applauded the agreement on Twitter. “Moments ago, following more than 20 consecutive hours of negotiations at @USDOL, the rail companies and union negotiators came to a tentative agreement that balances the needs of workers, businesses, and our nation’s economy,” he wrote.

The White House statement didn’t specify details of the tentative deal. Earlier, one of the unions representing U.S. railroad workers said its members rejected a tentative agreement its leaders had reached. The International Association of Machinists and Aerospace Workers, or IAM, had said its 4,900 members had voted to reject an agreement reached with the biggest U.S. freight railroads as part of broader negotiations. A central dispute is over attendance policies and unscheduled days off if workers or their family members get sick, an IAM union official said.

With details on this tentative deal slim, it remains to be seen whether this was an actual breakthrough.

Deposits Fall

For the first time since 2018, deposits at US banks have fallen.Of course, this is after a dramatic increase in bank balance sheets due to the pandemic.

Deposits at U.S. banks fell by a record $370 billion in the second quarter, the first decline since 2018.

Deposits fell to $19.563 trillion as of June 30, down from $19.932 trillion in March, according to the Federal Deposit Insurance Corp. 

The outflow in the quarter isn’t a problem for banks, which are sitting on more deposits than they want. Deposits in the banking system usually stay relatively stable but swelled by some $5 trillion in the past two years due to pandemic stimulus. Now, a series of Federal Reserve rate increases is taking some of that money out of the system, in part by decreasing demand for loans and increasing demand for government bonds.

Some analysts expect the decline in customer deposits to spur banks to hold fewer reserves at the Fed. How fast that happens will carry implications for the Fed, including when it stops tightening and the ultimate size of its balance sheet. 

Complicating forecasts is a $2.2 trillion Federal Reserve Bank of New York program where investors park cash, which has held steady despite rising rates. That money is largely coming from money-market funds. The reverse repo facility swelled during the pandemic, when overloaded banks started pushing their customers to put some of their deposits in money-market funds.

Many analysts thought money would drain out of the reverse-repo facility first. But so far, the opposite has happened, and deposits declined, which could reduce bank reserves at the Fed faster than expected. That could prompt the Fed to stop tightening early next year, some economists have said.

Increasingly, banks are telling us that they are loaned up and are curbing loan originations. Some are stuck with low-yielding loan portfolios in the 3s and contemplating selling at a loss, in order to re-deploy the funds at higher yields.  

Fed Revisiting Mergers?

While they are slow-walking the approval of some large bank mergers, the Federal Reserve is beginning to reconsider bank mergers by looking at both the increased risk of larger financial institutions and the impact on competition.   Details at this point are light.

A once-in-a-generation review of bank merger oversight policy is gaining momentum now that the Federal Reserve's new vice chair for supervision has been seated, and senior government officials shed light on their thinking in public appearances last week.

The timing for any formal proposals remains uncertain. However, the rethink, which follows an executive order by President Joe Biden calling for a governmentwide assessment of competition policy, is already believed to have drawn out the approval process for some pending bank deals. Michael Barr, in his debut speech on Sept. 7 as the Fed's top regulator, said he would have more to say on the subject soon.

Like colleagues at other agencies, Barr said revisiting regulators' duties under the Dodd-Frank Act to weigh financial stability risks is critical. He also said the Fed will be looking at potentially tougher standards for the largest regional banks to minimize the risk they pose if they fail. Earlier this year, acting Comptroller of the Currency Michael Hsu raised the idea of extending capital and other requirements that currently apply to just eight of the biggest and most systemically important U.S. banks to large regionals and possibly conditioning merger approvals on the adoption of such standards.

Regulatory officials also said an update to competition and community impact analysis is needed because of vast changes in the financial services industry, including competition from nonbanks and complexities introduced by partnerships between banks and financial technology companies. The reconsideration could lead to a pivot away from the Herfindahl-Hirschman Index, or HHI, a relatively straightforward algorithm that has been used by regulators to assess competitive implications based on deposit market share.

As of the latest FDIC Quarterly Banking Profile, there are 4,771 banks. At the end of 2007, there were 8,559 banks. We think the Fed’s focus will likely be on the super-regional banks and preventing them from becoming “too-big-to-fail” via M&A.   Will they also curtail mergers between smaller institutions due to competitive dynamics?

The 4MM Thundering Herd Resi Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $4MM Thundering Herd Resi Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • A total outstanding balance of $4,000,557 comprised of 40 loans

  • A weighted average coupon of 5.57%

  • Properties are located in three states, West Virginia (90%), Ohio (8%), and Kentucky (2%) with 74% of the portfolio within the Huntington-Ashland WV-KY-OH MSA

  • A weighted average maturity of 266 months (22.2 years)

  • 75% of the loans are ARMs and the remaining are fixed

  • A weighted average LTV of 60%

  • The entire portfolio is performing

Timeline:

Sale Announcement: Thursday, September 8, 2022

Due Diligence Materials Available Online: Monday, September 12, 2022

Indicative Bid Date: Thursday, September 22, 2022

Preferred Closing Date: Friday, September 30, 2022

Please click here to view the executive summary. The confidentiality agreement is in the upper left hand corner.