Category Archives: Finance & Banking

ESG – Required/Desired Unmentionables

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According to a recent Bloomberg survey:

About two-thirds of respondents in a survey of roughly 300 Bloomberg terminal users said the anti-ESG movement that started in the US last year will force firms to stop using those three letters in conversations with clients. However, they’ll continue to incorporate environmental, social and governance metrics in their business, they also said.

And the market reflects the controversy with corporate dollar denominated ESG bond sales declined from $91 billion in 2021 to $30 billion in 2023.

In addition, ESG isn’t highly ranked in importance:

Some 85% of respondents who identified themselves as being engaged with ESG said financial performance is the most important factor to consider when investing. Only 39% said the same of ESG, which was the lowest reading in the survey.

On the flip side, Bloomberg also reports that Morgan Stanley, the 7th largest underwriter of ESG debt, reports a decent pipeline growing stronger into 2024 and BNP Paribas, the largest underwriter, is predicting a banner year.

So why continue to incorporate ESG when you can mention it and don’t think highly of the concept and why the divergence in between “decent pipeline” and “banner year”?

The answer is a mix of increasing demand for ESG investments with faster growth outside of the US and regulatory requirements. While the GOP is making ESG a four-letter word in the US, the EU is strengthening ESG requirements including verification of ESG validity and compliance. The SEC is also increasing scrutiny of ESG claims.

So, the current situation:

  • Many investors, including major institutions, want ESG investments.
  • EU and other non-US investment regulators are increasingly requiring ESG reporting and in some cases requiring some level of ESG investment.
  • US and other regulators are cracking down on “greenwashing” i.e. falsely claiming ESG compliance.
  • US will fall behind EU and other countries in requiring, originating, and regulating ESG investments.

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Real Estate Markets – Not Even Close Enough to Haggle

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Participated this morning in the monthly Columbia Business School RE Circle, the Paul Milstein Center for Real Estate International Real Estate Alumni Meeting: Updates on RE Markets Around the World.

Participants confirmed my opinions that:

Sellers are looking for 4-4.5 caps and buyers looking for 5-5.5 caps – indicating a 20% decline in value and too far apart to even haggle.

Funds that were lending at 8% and leveraging up with an A-piece from a bank can’t cause banks now charging 8%.

Lots of money sitting on the sidelines and more funds being raised with nowhere to go.

Equity funds raising money for debt funds to play lower down on the LTV.

Only asset class that’s optimistic is single family.

Values down 20% and market won’t start clearing for 6 months or so.

Banks/Special Servicers will cooperate to avoid a panic.

Mezz/Pref Equity that’s really Equity + Hope Note is the future.

White Knight Pref Equity To The Rescue

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What is White Knight Pref Equity?

White Knight Pref Equity is the investment of new funds into a capital stack by a friendly investor to solve a refinance or other shortfall. It is the opposite of bottom-fishing or vulture investing or loan-to-own. 

How does it work?

Say for example you have a property where changes in cap rates and LTVs leaves your refinancing short by $10 million, the White Knight Pref Equity funds the gap.

Why be a White Knight?

For example, a pension fund real estate investor that I work with had a problem. They buy or JV on existing and to-be-built low/mid-rise residential rental properties and BTR projects. The market for that product is extreme competitive and even paying market rates, they kept losing deals to other buyers – even at the same price. Last to play golf with the broker got the deal.

Their solution – offer favorable terms for White Knight Pref Equity in return for a Right of First Refusal. The property owner receives favorable, even below market funding, The lender receives an acceptable rate of return and is first at the table in the event of a sale.

A win-win.

Declining Real Estate Values

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Bloomberg published an article – Global Real Estate is Sitting on a $175 Billion Debt Time Bomb – Bloomberg – regarding the rise in distressed real estate debt and decline in values. 

The $175B in distressed real estate debt is quite striking – exceeding the combined total distressed debt of the next 9 largest distressed debt by asset types.

US real estate has declined 9% in value while UK real estate is down 20%. MSCI opines in its 2023 Trends to Watch in Real Assets – MSCI that London offices will need to decline by another 9% to be of interest to investors. But the US is lagging, not avoiding.

Of course. both distressed debt and declining values are intimately interconnected and amplified by the low cap rates and interest rates of the past.

For example, a property with $1 million net income valued at a 4.5 cap rate is $22.2 million and an 80% LTV loan would be $17.8 million. The same property at a 5.5 cap rate is valued at $18.2 million – an 18% decline in value. The loan LTV is now 98%. In short, the sponsor’s 5-10% equity and most, if not all, of the LP equity is wiped out.

Although the property could still be servicing the low interest rate debt, the minimum loan required LTV is out of balance – to which the regulators could turn a blind eye allowing the lenders to kick the can down the road – but the real distress will eventually come with the refinancing when the loan must be paid-down or deed handed over.

So, we’re entering the stage in the cycle of white knights and loan-to-own and bets on if we’re buying at a discount or catching the knife on the way down.

 

The Biggest Emerging Market Debt Problem Is in America by Carmen M. Reinhart – Project Syndicate

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Likewise, for those procuring corporate borrowers and bundling corporate CLOs, volume is its own reward, even if this means lowering standards for borrowers’ creditworthiness. The share of “Weakest Links” – corporates rated B- or lower (with a negative outlook) – in overall activity has risen markedly since 2013-2015. Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure compliance with their terms and thus minimize default risk – have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume………

Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance (up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place.

 

Source: The Biggest Emerging Market Debt Problem Is in America by Carmen M. Reinhart – Project Syndicate

Banks are far more exposed to risky real estate loans than you think — thanks to this loophole Big Banks increasingly back debt funds and mortgage REITs

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…But below the surface, banks are far more exposed to risky real estate loans than commonly thought thanks to a skyscraper-sized loophole: Instead of lending to construction projects directly, they increasingly lend to debt funds and mortgage trusts managed by private equity firms, which in turn lend to developers. Slate insists that the RiverTower deal wasn’t particularly risky, that it came with a big equity buffer and that it gets low interest rates on its loans. But in other cases, such as ground-up construction loans, the risk to lenders is more obvious…

 

Real Estate Lending | A-Notes

By Konrad Putzier and Rich Bockmann | November 06, 2017

Rising seas could wipe out $1 trillion worth of U.S. homes and businesses | Grist

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Some 2.4 million American homes and businesses worth more than $1 trillion are at risk of “chronic inundation” by the end of the century, according to a report out Monday. That’s about 15 percent of all U.S. coastal real estate, or roughly as much built infrastructure as Houston and Los Angeles combined.

The sweeping new study from the Union of Concerned Scientists is the most comprehensive analysis of the risks posed by sea level rise to the United States coastal economy. Taken in context with the lack of action to match the scale of the problem, it describes a country plowing headlong into a flood-driven financial crisis of enormous scale.

 

Check out interactive map to see how your home, zip code or community does: http://US Coastal Property at Risk from Rising Seas.

Union of Concerned Scientists report at: Underwater: Rising Seas, Chronic Floods, and the Implications for US Coastal Real Estate (2018)

Grist: Rising seas could wipe out $1 trillion worth of U.S. homes and businesses

Is the global economy just a giant debt scam? What the financial elite doesn’t want you to know | Salon.com

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Let’s restate that, because it gets more shocking the more you think about it. The bailout money came from the European Central Bank and the IMF, largely meaning the taxpayers of France, Germany and other prosperous nations of Western Europe. Exactly none of it went to restore social services or repair roads in Greece. All of it was used to make payments on the Greek government’s existing debt — most of which was to banks in Western Europe. So Angela Merkel and François Hollande (then the French president) and other political leaders extorted money from their own taxpayers, on the pretense that they were helping out a small, struggling nation on Europe’s southern fringe, and siphoned it directly to the biggest European banks, largely in their own countries. It was a direct wealth transfer from ordinary people to the financial elite.

Source: Is the global economy just a giant debt scam? What the financial elite doesn’t want you to know | Salon.com

An Infrastructure Plan That Would Actually Work by Willem Buiter & Dag Detter – Project Syndicate

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The total value of commercial assets owned by state and local governments is sure to be of the same magnitude, or larger. After all, local governments own and operate most airports and ports, as well as utilities such as water, sewerage, and electricity – all of which are in desperate need of funding. But real estate comprises the bulk of public commercial assets. By some estimates, publicly owned assets account for as much as one-quarter of the total market value of real estate in a city or county. At the same time, many localities need additional funding for affordable housing.

All told, this public wealth represents a substantial opportunity for investors, local governments, and society as a whole. If professionally managed, the yield from such a vast portfolio of commercial assets could fund not just critically needed infrastructure investments, but also any other public goods and services that are in demand.

Source: An Infrastructure Plan That Would Actually Work by Willem Buiter & Dag Detter – Project Syndicate

Seychelles Finds A Novel Way To Swap Its Debt For Marine Protections : The Two-Way : NPR

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The Seychelles have brokered a novel deal that will allow the island archipelago to swap millions of dollars in sovereign debt for protecting nearly one third of its ocean area.

It’s hailed as the first of its kind. “Seychelles is clearly breaking new grounds and with it, it has positioned itself as a world leader in ocean governance and management,”

https://www.npr.org/sections/thetwo-way/2018/02/23/588273709/seychelles-finds-a-novel-way-to-swap-its-debt-for-marine-protections

Why cities should stop fighting big banks and create their own – Salon.com

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Frack-happy, Trump-supporting North Dakota probably isn’t the first place you would expect to find a working model, but since 1919, the state has used the Bank of North Dakota to finance everything from student loans to sewer upgrades and small business loans. The bank just posted its thirteenth consecutive year of record profits, earning more than $136 million in 2016. And unlike at a big private bank, that money goes right back into investing in the people, rather than into investors’ pockets.

Source: Why cities should stop fighting big banks and create their own – Salon.com

Bank of America confirms Dublin as location for EU hub

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Even if the UK reverses and doesn’t Brexit, the genie is out of the bottle. While London may survive as Europe’s premier financial center in a no-Brexit scenario, it will be by a smaller margin and with more competition.
Frankfurt and Dublin will be more important as financial centers with or without Brexit. Paris will gain – especially as high-speed transportation links advance. Just as Wall Street now stretches coast-to-coast, the European financial industry will spread across Europe. And don’t forget, non-financial institutions are also important and also relocating. For a country with strict gun control, the Tories-led UK has amazingly managed to shoot itself in one foot with no-Brexit and both feet with Brexit.

Wall Street giant Bank of America Merrill Lynch has picked Dublin as the preferred location of its EU hub, joining a growing number of international financial groups to outline initial plans for how they plan to deal with the fallout from Brexit.

Speaking to The Irish Times in Dublin on Friday, group chief executive Brian Moynihan said this will result in the bank’s existing Irish subsidiary merging with its current most important EU banking unit, based in London.

It will also involve the group setting up an EU trading operation, or broker-dealer, in the Republic, which will require separate Central Bank approval, he said.

 

Source: Bank of America confirms Dublin as location for EU hub

NYC Real Estate | NYC Luxury Market | 432 Park Ave

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It took two months longer on average to sell a New York City luxury apartment in 2016 compared with 2015. That’s according to the real-estate agency Olshan Realty, which on Wednesday published its year-end report on the New York residential market.

It backed up other reports released earlier in 2016 that showed the luxury market in Manhattan, New York’s most expensive borough, had a tough year. Unlike other price segments of the housing market, there’s an excess of luxury apartments, giving buyers power to negotiate asking prices lower.

“New York City’s rental market has been mostly steady, except at the high end, where the inventory has risen and rents have drifted down,” the Federal Reserve said in a recent Beige Book based on comments from its contacts.

Source: NYC Real Estate | NYC Luxury Market | 432 Park Ave

Paul Krugman: Donald Trump’s infrastructure plan is one big scam – Salon.com

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Paul Krugman: Donald Trump's infrastructure plan is one big scam

Trump’s plan to rebuild the country’s infrastructure is really a scheme to enrich wealthy people…..

There is also the fact that private investors will have no interest in building infrastructure that can’t be turned into a profit center. Privatizing these public projects is a gratuitous hand out to select investors, who would be aquiring public assets for “just 18 cents on the dollar, with taxpayers picking up the rest of the tab.

Source: Paul Krugman: Donald Trump’s infrastructure plan is one big scam – Salon.com