Fears of a systemic credit event are growing among fund managers as alarms sound in property markets around the world.
Author of the article:
Bloomberg News
Neil Callanan
Published Feb 17, 2024 • 4 minute read
hj4)ra2qt8h9j7x[uaebe)ob_media_dl_1.png Source: MSCI Real Assets
(Bloomberg) — Fears of a systemic credit event are growing among fund managers as alarms sound in property markets around the world.
About one in six of those polled considers such a crunch to be the biggest tail risk facing markets, compared to about one in 11 in December, according to Bank of America Corp.’s latest Global Fund Manager survey. The deepening disquiet in US commercial real estate and Chinese property markets means it’s now the third-biggest worry for respondents, lagging higher inflation and geopolitics.
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Hopes that the Federal Reserve would cut interest rates and alleviate some of the pressure on real estate were dented by stronger-than-expected inflation numbers this week. Traders are now wagering on less than 90 basis points of cuts this year — almost half of what was expected in January. Meanwhile, more than $900 billion of debt on US commercial and multifamily real estate will require refinancing or property sales this year — a 40% jump from an earlier estimate — after banks extended loans among other factors, and as building values fall.
Smaller banks seem to be on a trajectory toward 8-10% default rates in their CRE loan books, warned Bruce Richards, Chairman of Marathon Asset Management, in a LinkedIn post this week. Those lenders are particularly vulnerable to the downturn in CRE after ramping up their exposure in recent years. By contrast, bigger banks “are as strong as the Rock of Gibraltar,” Richards said by phone.
A 10% default rate on CRE loans would result in about $80 billion of additional bank losses, according to a research paper on US bank fragility published in December. The paper warns that CRE distress could leave more than 300 mainly smaller regional banks at risk of solvency runs.
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“We will continue to see upticking levels of distress,” said Omar Eltorai, director of research at data provider Altus Group. “It’s one of those variables that people can call early but there’s a delay before it passes through,” he said, adding that this can sometimes be measured in years.
Click here to read a charticle about the CRE debt crisis
For now, the Fed is coordinating with lenders with concentrated CRE exposure on a plan to work through expected losses. While the losses are a concern, US regulators are trying to ensure that loan-loss reserves and liquidity levels are adequate to cope, Treasury Secretary Janet Yellen said earlier this month.
Still, nearly 40% of fund managers see US CRE as the most likely source of a credit event, the BofA survey found, with a further 22% seeing Chinese real estate as the biggest threat. The survey took place from Feb. 2 to 8, just days after New York Community Bancorp slashed its dividend and stockpiled reserves, in part because of weakness in the office and multifamily markets.
Read More: NYCB’s Talks With Watchdog Led to Moves That Rocked Market
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The turmoil has since spread to German lenders with exposure to US CRE. Bonds of Deutsche Pfandbriefbank AG fell further into distressed territory on Thursday after S&P Global Ratings downgraded the bank, citing its high exposure to the beleaguered market.
Click here to listen to a podcast about Fidelity’s worries on creditor violence
Week in Review
The wave of money making its way into the credit market is acting as a shield for investors against every negative scenario — even the prospect of ever-fewer central bank cuts this year.US banks are starting to ramp up purchases of everything from mortgage-backed securities to collateralized loan obligations after nearly two years of cutting back.An insurance product that consumers use to help fund their retirements is selling at record levels, powering demand for corporate debt and commercial mortgage bonds.Insatiable demand for blue-chip bonds in the US is pushing investors to shrug off any jitters tied to New York Community Bancorp’s risky exposure to real estate.JPMorgan Chase & Co. beat private credit lenders to provide around $2.5 billion in debt financing to support Cohesity Inc.’s proposed acquisition of a unit of Veritas Technologies.Logan Group Co. bought more time to push through its debt restructuring plan, after a Hong Kong court batted down creditor petitions to liquidate the Chinese developer’s two key units.Redsun Properties Group Ltd., another Chinese developer, received a wind-up petition in a Hong Kong court filed by The Bank of New York Mellon.China South City Holdings Ltd.’s notes plummeted at a record pace after the builder defaulted on a dollar bond for the first time, reflecting fresh concerns over the extent of government support for the beleaguered sector.Bristol Myers Squibb sold $13 billion of bonds to help finance its acquisitions of Karuna Therapeutics Inc. and RayzeBio Inc., in a deal that gathered orders exceeding $85 billion.Siemens AG sold Europe’s largest corporate bond offering in a year on the heels of a credit-rating upgrade.A group of banks launched a $5 billion leveraged loan sale to help finance KKR & Co.’s purchase of a stake in Cotiviti Inc.
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On the Move
Citigroup Inc. hired JPMorgan Chase & Co. veteran John Witherspoon as a managing director in its real estate investment-banking team.Alberta Investment Management Corp., one of Canada’s largest pension plans, is opening a New York office as it pushes further into private credit investing.Newmark Group Inc. has recruited Matthew Featherstone to head up its debt and structured finance business for the UK and Europe.S&P Global Ratings has hired David Knutson, the former senior investment director at Schroders Plc, to succeed Gerard Painter who’s set to retire at the end of the month.
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