Tech stocks may have been the play for 2023, but for next year Bank of America Securities likes their debt. The bank called investment-grade corporate bonds of technology companies one of its top 10 trades for 2024. “Own tech balance sheets, but not tech EPS in ’24,” investment strategist Michael Hartnett wrote in a Nov. 19 note. The “Magnificent 7” tech stocks — Apple , Alphabet , Amazon , Microsoft , Meta Platforms , Nvidia and Tesla — led the market higher this year. Nvidia, for instance, has skyrocketed a staggering 229% year to date, while Meta is up 190% so far this year. The tech-heavy Nasdaq has gained 39% year to date. Hartnett said his call on the bonds of big U.S. tech companies is a “great, underappreciated contrarian hedge” in a year that will likely see rate cuts from the Federal Reserve and either a “hard landing” or “soft landing” for the economy. “How do you position for unexpected events next year? A decent hedge would be the bonds of companies that have a lot of cash,” he added. “The Magnificent 7 have a lot of cash.” That unexpected event would be a hard landing, according to Harnett. He says the consensus view is a soft landing, or a gradual easing of inflation and the labor market in response to the Fed’s rate hikes. But Harnett expects there is a greater risk than expected that the economy will slow down abruptly. If a hard landing is underpriced by investors, then this outcome unquestionably will be negative for equities, Harnett explained. With the biggest positions in equities in the Magnificent 7, a hard landing would lead to deleveraging of those stocks, he added. It would also be positive for bonds. “You would get some rotation into high quality corporate bonds — and there is nothing more high quality in the corporate bond market than large-cap U.S. tech,” Hartnett said. Overall, he expects money to flow into bonds next year. Buying investment-grade tech corporate bonds is just one side of the firm’s barbell strategy in the asset class, he said. “You certainly want exposure to what we would call the diamonds in the rough — the best house in the worst neighborhood, like banks,” Hartnett said. — CNBC’s Michael Bloom contributed reporting.
Some firms sustain their businesses by taking on more debt that they can repay. Economists call them zombie companies. When compared to their peers, zombies are smaller in size and deliver lower returns to investors. These companies distort markets, keeping resources from their fundamentally sound competitors. Banks and governments keep zombie firms alive with bailout loans. As the Federal Reserve resets the economy with higher interest rates, many zombie firms are filing for bankruptcy.
China’s real estate troubles are accelerating. Prospective home buyers are holding back on making purchases, leading to weak sales that compound the urgent need for policymakers to step up support for the industry.
New home sales for the top 100 developers dropped by about a third in June and July from a year ago, after double-digit growth earlier in the year, said Edward Chan, a director at S&P Global Ratings. With most apartments in China sold before they are completed, weak new home sales will likely lead to significant cash flow issues for developers.
“We think the situation is probably getting a little bit worse because of this Country Garden incident,” Chan told CNBC in a phone interview Thursday. He added he hasn’t seen any improvement in new home sales so far.
At a time when rafts of data are pointing to a rapidly slowing economy, this lack of improvement, along with Country Garden‘s looming default, is making it more difficult for property developers to raise funds.
Late Thursday in the U.S., the world’s most indebted property developer Evergrande filed for bankruptcy protection, further shaking up investor confidence.
The deepening crisis of confidence is adding to pressure on the world’s second-largest economy.
The debt troubles at Country Garden and the uncertainty of government support are feeding into broader unease in the Chinese housing market.
Louise Loo
Oxford Economics
The Chinese property sector has been reeling since 2020, when Beijing cracked down on the debt levels of mainland property developers.
Years of exuberant growth led to the construction of ghost towns where supply outstripped demand as developers looked to capitalize on the desire for home ownership and property investment.
These measures, known as China’s “three red lines” policy, point to three specific balance sheet conditions developers must meet if they want to take on more debt.
The rules require developers to limit their debt in relation to the company’s cash flow, assets and capital levels, with highly indebted developer Evergrande the first headline-grabbing default in late 2021.
A default by Country Garden could add $9.9 billion to the year-to-date global emerging markets high-yield corporate default tally, taking the total default volume for the Chinese property sector to $17 billion to-date in 2023, JPMorgan said in a note dated Aug. 15.
The U.S. investment bank expects China property to account for nearly 40% of all emerging market default volumes in 2023.
Much of Country Garden’s problems have to do with its outsized exposure to less developed parts of China known as lower-tier cities. About 61% of developments, according to the company’s 2022 annual report, are in these lower-tiered cities, where housing supply outstrips demand.
“Country Garden sales performance has been kind of disastrous,” S&P Global’s Chan said, noting that sales in June and July dropped by about 50% year-on-year.
Chan said that lower-tier cities started to see sales weakness in May, while higher-tier cities started to see sales worsen in subsequent months.
As a result of Country Garden’s troubles, Chan said it’s “becoming more and more challenging” for China’s overall real estate sales to reach S&P’s base case of 12 trillion yuan to 13 trillion yuan this year.
“Instead of an L-shape it could be a descending staircase,” he said.
Chan said S&P’s bear case for China’s property sector is for 11 trillion yuan in sales this year, and 10 trillion yuan for 2024.
That’s still only nearly half of what the country’s real estate market sales were at its peak 2021 — at 18 trillion yuan, according to figures Chan shared.
At their mid-year economic review meeting in July, China’s top leaders vowed to “adjust and optimize policies in a timely manner” for its beleaguered property sector.
To date, they have yet to clearly demonstrate their plan to adapt to “major changes” in the demand-supply dynamics in the property market.
“The debt troubles at Country Garden and the uncertainty of government support are feeding into broader unease in the Chinese housing market,” Louise Loo, lead economist at Oxford Economics, wrote in a note dated Aug. 11.
As China’s property sector consolidates amid the debt and credit malaise, state-owned developers are better positioned to grow than non-state ones.
State-owned developers saw contracted sales grow by 48% in the first seven months of this year from a year ago, while developers that were not state-owned saw sales fall by 19%, according to data from Natixis Corporate and Investment Banking.
This is enhancing state-owned developers’ ability to buy land from local governments since robust home sales are boosting their cash flow.
“Nowadays, 87% of the land purchases are by [state-owned enterprises], so how do you expect [privately owned enterprises] to grow further?” Gary Ng, a senior economist at Natixis, said in a phone interview Tuesday.
For this year through July, 87% of land purchases by value were by state-owned developers, similar to last year, Natixis data showed. That’s up sharply from 59% in 2021, the data showed.
Ng expects state-owned developers to have greater ownership in China’s real estate market going forward. But he said that while non-state-owned developers have had leverage problems in the past, having so many state-owned developers in the industry might make it more difficult to forecast actual demand.
Still, underlying housing demand in first-tier cities remains somewhat resilient and untapped, and may be unleashed once there’s greater policy clarity.
“Timely policy in stabilizing the demand and sales in the higher-tier cities would be very important,” said Chan from S&P Global.
“If that could be achieved then over time, the stabilization could be spilled over to the lower-tier cities. But that will take an even longer time.”
A sign for the financial agency Fitch Ratings on a building at the Canary Wharf business and shopping district in London, U.K., on Thursday, March 1, 2012.
Matt Lloyd | Bloomberg | Getty Images
A Fitch Ratings analyst warned that the U.S. banking industry has inched closer to another source of turbulence — the risk of sweeping rating downgrades on dozens of U.S. banks that could even include the likes of JPMorgan Chase.
The ratings agency cut its assessment of the industry’s health in June, a move that analyst Chris Wolfe said went largely unnoticed because it didn’t trigger downgrades on banks.
But another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 U.S. banks it covers, Wolfe told CNBC in an exclusive interview at the firm’s New York headquarters.
“If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions,” Wolfe said.
The credit rating firms relied upon by bond investors have roiled markets lately with their actions. Last week, Moody’s downgraded 10 small and midsized banks and warned that cuts could come for another 17 lenders, including larger institutions like Truist and U.S. Bank. Earlier this month, Fitch downgraded the U.S. long-term credit rating because of political dysfunction and growing debt loads, a move that was derided by business leaders including JPMorgan CEO Jamie Dimon.
This time, Fitch is intent on signaling to the market that bank downgrades, while not a foregone conclusion, are a real risk, said Wolfe.
The firm’s June action took the industry’s “operating environment” score to AA- from AA because of pressure on the country’s credit rating, regulatory gaps exposed by the March regional bank failures and uncertainty around interest rates.
The problem created by another downgrade to A+ is that the industry’s score would then be lower than some of its top-rated lenders. The country’s two largest banks by assets, JPMorgan and Bank of America, would likely be cut to A+ from AA- in this scenario, since banks can’t be rated higher than the environment in which they operate.
And if top institutions like JPMorgan are cut, then Fitch would be forced to at least consider downgrades on all their peers’ ratings, according to Wolfe. That could potentially push some weaker lenders closer to non-investment grade status.
For instance, Miami Lakes, Florida-based BankUnited, at BBB, is already at the lower bounds of what investors consider investment grade. If the firm, which has a negative outlook, falls another notch, it would be perilously close to a non-investment grade rating.
Wolfe said he didn’t want to speculate on the timing of this potential move or its impact to lower-rated firms.
“We’d have some decisions to make, both on an absolute and relative basis,” Wolfe said. “On an absolute basis, there might be some BBB- banks where we’ve already discounted a lot of things and maybe they could hold onto their rating.”
JPMorgan declined to comment for this article, while Bank of America and BankUnited didn’t immediately respond to messages seeking comment.
In terms of what could push Fitch to downgrade the industry, the biggest factor is the path of interest rates determined by the Federal Reserve. Some market forecasters have said the Fed may already be done raising rates and could cut them next year, but that isn’t a foregone conclusion. Higher rates for longer than expected would pressure the industry’s profit margins.
“What we don’t know is, where does the Fed stop? Because that is going to be a very important input into what it means for the banking system,” he said.
A related issue is if the industry’s loan defaults rise beyond what Fitch considers a historically normal level of losses, said Wolfe. Defaults tend to rise in a rate-hiking environment, and Fitch has expressed concern on the impact of office loan defaults on smaller banks.
“That shouldn’t be shocking or alarming,” he said. “But if we’re exceeding [normalized losses], that’s what maybe tips us over.”
The impact of such broad downgrades is hard to predict.
In the wake of the recent Moody’s cuts, Morgan Stanley analysts said that downgraded banks would have to pay investors more to buy their bonds, which further compresses profit margins. They even expressed concerns some banks could get locked out of debt markets entirely. Downgrades could also trigger unwelcome provisions in lending agreements or other complex contracts.
“It’s not inevitable that it goes down,” Wolfe said. “We could be at AA- for the next 10 years. But if it goes down, there will be consequences.”
Traders work the floor of the New York Stock Exchange in New York City on May 31, 2023.
Spencer Platt | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Oh, snap Major U.S. indexes fell across the board Friday and snapped their multiweek winning streaks. Stock markets in Europe traded lower too. Asia-Pacific markets were mostly lower Monday, with South Korea’s Kospi being the only major index that traded higher, climbing 0.5%, as of publication time. Separately, oil prices rose amid fears that supply would be disrupted after the Wagner Group’s attempted insurrection in Russia.
Debts, defaults and distress There have been 41 corporate defaults in the U.S. so far — the most globally and more than double during the same period last year, according to Moody’s Investors Service. Troublingly, Moody’s expects the global default rate to rise to 5% by April 2024, compared with the long-term average of 4.1%. Analysts blame high interest rates for this tumult.
[PRO] Markets on an even footing Markets may have declined last week, but CNBC Pro’s Michael Santoli thinks there’s still a “favorable underlying market trend.” Despite worries about a banking crisis, narrow rallies and speculative stocks, the S&P 500 is still nearly up 15% for the year — which points to a market on even footing, ready to climb further.
Last week wasn’t pretty for U.S. stocks — but that’s not necessarily a bad thing.
On Friday, all major indexes fell and closed lower for the week. On a weekly basis, the S&P 500 was down 1.4%, its first week-over-week loss after five consecutive weeks of gains. The Dow Jones Industrial Average fell almost 1.7% to snap its three-week positive run. The Nasdaq Composite slipped 1.4%, ending an eight-week winning streak to post its worst weekly performance since March.
Those figures may sound disappointing, but Art Hogan, chief market strategist at B. Riley Wealth Management, thinks it’s just the markets finding their balance after being overbought, meaning that stocks have been trading above what they were worth. As Barclays strategist Venu Krishna notes, “the broader Tech sector appears frothy.” That is to say, even though the S&P technology sector has rallied nearly 40% this year, the rest of the index has remained flat.
Going by both those analysts’ logic, the dip in markets last week, then, may be a positive sign that some of the froth around tech is being skimmed off. (Indeed, Nvidia shares lost 1.9%, Microsoft slipped 1.38% and Tesla sank 3.03% Friday.) Investors, then, can focus again on what’s beneath the froth: The financial health of companies amid inflation and interest rates. Compared with excitement over artificial intelligence, that’s a much better indication of stocks’ long-term trajectory.
On that note, the core personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation, comes out Friday, and will give a clearer picture of whether the Fed will continue hiking rates after leaving them unchanged in June. Froth is, by nature, hollow: A slight increase in heat will cause it to melt completely.
Traders work on the floor of the New York Stock Exchange (NYSE) on June 01, 2023 in New York City.
Spencer Platt | Getty Images News | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Black skies for Goldman Goldman Sachs may have to absorb a large write-down on its attempted sale of GreenSky, CNBC has learned. In September 2021, the investment bank, under CEO David Solomon, bought the fintech lender for $2.24 billion as part of its push into consumer finance. But just 18 months later, Solomon said he’s selling the business amid stumbles in Goldman’s consumer ambitions.
Debts, defaults and distress There have been 41 corporate defaults in the U.S. so far — the most globally and more than double during the same period last year, according to Moody’s Investors Service. Troublingly, Moody’s expects the global default rate to rise to 5% by April 2024, compared with the long-term average of 4.1%. Analysts blame high interest rates for this tumult.
Rebellion in Russia On Saturday, Wagner Group mercenaries took control of Rostov, a southern city in Russia, and marched toward Moscow. Less than 24 hours after that, Wagner leader Yevgeny Prigozhin declared his rebellion over, in a deal brokered by Belarusian President Alexander Lukashenko. U.S. Secretary of State Antony Blinken said the events revealed “cracks” in Russia that “weren’t there before.”
[PRO] Markets on an even footing Markets may have declined last week, but CNBC Pro’s Michael Santoli thinks there’s still a “favorable underlying market trend.” Despite worries about a banking crisis, narrow rallies and speculative stocks, the S&P 500 is still nearly up 15% for the year — which points to a market on even footing, ready to climb further.
Last week wasn’t pretty for U.S. stocks — but that’s not necessarily a bad thing.
On Friday, all major indexes fell and closed lower for the week. On a weekly basis, the S&P 500 was down 1.4%, its first week-over-week loss after five consecutive weeks of gains. The Dow Jones Industrial Average fell almost 1.7% to snap its three-week positive run. The Nasdaq Composite slipped 1.4%, ending an eight-week winning streak to post its worst weekly performance since March.
Those figures may sound disappointing, but Art Hogan, chief market strategist at B. Riley Wealth Management, thinks it’s just the markets finding their balance after being overbought, meaning that stocks have been trading above what they were worth. As Barclays strategist Venu Krishna notes, “the broader Tech sector appears frothy.” That is to say, even though the S&P technology sector has rallied nearly 40% this year, the rest of the index has remained flat.
Going by both those analysts’ logic, the dip in markets last week, then, may be a positive sign that some of the froth around tech is being skimmed off. (Indeed, Nvidia shares lost 1.9%, Microsoft slipped 1.38% and Tesla sank 3.03% Friday.) Investors, then, can focus again on what’s beneath the froth: The financial health of companies amid inflation and interest rates. Compared with excitement over artificial intelligence, that’s a much better indication of stocks’ long-term trajectory.
On that note, the core personal consumption expenditures index, the Federal Reserve’s preferred measure of inflation, comes out Friday, and will give a clearer picture of whether the Fed will continue hiking rates after leaving them unchanged in June. Froth is, by nature, hollow: A slight increase in heat will cause it to melt completely.
One97 Communications Limited (OCL), which owns the Paytm brand, on Monday said that its wholly-owned subsidiary Paytm Money Limited has launched bonds platform for retail investors in India.
The company is making bonds more accessible for retail investors by offering three distinct types: government bonds, corporate bonds and tax-free bonds.
Varun Sridhar, CEO, Paytm Money said, “This is just the start of bonds investing in India. We believe bonds are the best way for first-time investors to enter capital markets and every Indian should have a diversified wealth portfolio with bonds being a core part of it. We will continue to bring the best technology-driven features for investors with the safety and security they deserve”, he said.
Bonds on the Paytm Money app presents investors with all relevant information in one place and convert everything to yield so that investors can analyse and understand the returns they can earn, Paytm has said.
Now, investors will not have to go to different sources for information on coupon vs yield, clean price vs dirty price, coupon frequency, coupon record dates etc, and instead find it all on one dashboard on the Paytm Money app
The company believes that investing in debt markets in India is still very new and the country has the potential to have 100 million investors, for whom bonds would be the best way to enter capital markets.
Bonds are a safe option for investors who are looking at a steady income and fixed returns on their investments and can diversify their portfolio for good returns. One can invest in Government of India Bonds, with maturity ranging from 16 days to 39 years, giving investors flexibility in managing their investments across the tenors. The yield on these bonds are currently between 7-7.3 per cent per annum. Further, bonds can be sold at any time, without any premature penalty/lock in, giving investors flexibility in managing their investments.
Tax free bonds are a great investment for Indians. One can invest in tax free bonds, issued by PSUs, like NHAI, IRFC, REC etc at yields of up to 5.8 per cent per annum, and maturity, ranging from 5 months to 13 years.
Investors, who wish to expand their portfolio, can also look at corporate bonds like Indiabulls Housing Finance, Edelweiss etc where depending on the credit profile of the company, and the maturity of the bond, one can earn up to 15 per cent per annum.
HIROSHIMA, JAPAN – MAY 17: People walk beneath a banner promoting the Group of 7 (G7) summit at a shopping street on May 17, 2023 in Hiroshima, Japan. The G7 summit will be held in Hiroshima from 19-22 May. (Photo by Tomohiro Ohsumi/Getty Images)
The global debt pile grew by $8.3 trillion in the first quarter to a near-record high of $305 trillion as the global economy faced a “crisis of adaptation” to rapid monetary policy tightening by central banks, according to a closely-watched report from the Institute of International Finance.
The finance industry body said the combination of such high debt levels and rising interest rates has driven up the cost of servicing that debt, triggering concerns about leverage in the financial system.
“With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more ‘zombie firms’ — already approaching an estimated 14% of U.S.-listed firms,” the IIF said in its quarterly Global Debt Monitor report late Wednesday.
The sharp increase in the global debt burden in the three months to the end of March marked a second consecutive quarterly increase following two quarters of steep declines during last year’s run of aggressive monetary policy tightening. Non-financial corporates and the government sector drove much of the rebound.
“At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly: Despite concerns about a potential credit crunch following the recent turmoil in the banking sectors of the U.S. and Switzerland, government borrowing needs remain elevated,” the IIF said.
The Washington, D.C.-based organization said aging populations, rising health care costs and substantial climate finance gaps are exerting pressure on government balance sheets. National defense spending is expected to increase over the medium term due to heightened geopolitical tensions, which would potentially affect the credit profile of both governments and corporate borrowers, the IIF projected.
“If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer,” the report noted.
Total debt in emerging markets hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the largest upward contributors.
In developed markets, Japan, the U.S., France and the U.K. posted the sharpest increases over the quarter.
Banking turmoil and a ‘crisis of adaptation’
The rapid monetary policy tightening exposed frail liquidity positions in a number of small and mid-sized banks in the U.S. and led to a series of collapses and bailouts in recent months. The ensuing market panic eventually spread to Europe and forced the emergency sale of Swiss giant Credit Suisse to UBS.
The IIF suggested that corporations have undergone a “crisis of adaptation” to what it termed a “new monetary regime.”
“Although recent bank failures appear more idiosyncratic than systemic — and U.S. financial institutions carry much less debt (78% of GDP) than in the run-up to the 2007/8 crisis (110% in 2006) — fear of contagion has prompted significant deposit withdrawals from U.S. regional banks,” the IIF said.
“Given the central role of regional banks in credit intermediation in the U.S., worries about their liquidity positions could result in a sharp contraction in lending to some segments, including underbanked households and businesses.”
This contraction of credit conditions could particularly affect small businesses, the IIF said, along with causing higher default rates and more “zombie firms across the board.”
Zombie firms are companies with earnings that are sufficient to allow it to continue operating and pay the interest on its debt, but not to pay off the debt, meaning any cash generated is immediately spent on debt. The company is therefore “neither dead nor alive.”
“We estimate that around 14% of U.S. companies can be considered zombies, with a substantial portion of these in the healthcare and information technology sectors.”
Signs explaining Federal Deposit Insurance Corporation (FDIC) and other banking policies on the counter of a bank in Westminster, Colorado November 3, 2009.
Rick Wilking | Reuters
If there wasn’t enough banking jargon to blind you, it’s time to learn a new piece of it: Welcome to the industry’s era of the “criticized loan.”
It’s a loan that’s not gone bust, or even missed a payment. But in a time when Wall Street is vibrating to any sign of recession risk, especially from banks, it’s gaining new currency. Criticized loans are those that show preliminary signs of higher risk, such as a developer who’s making payments but is otherwise having financial trouble, or an office building that recently lost a big tenant and needs to replace it.
And they’re rising, which sets off the kind of bells that have sent bank stocks down roughly 20% since early March, even as earnings from the sector are coming in healthier than expected. Wall Street is watching stats on commercial real estate loans almost as closely as for signs that depositors are fleeing for higher interest rates paid by money-market funds (the No. 1 question on recent earnings calls).
Banks are being asked more about criticized loans partly because other credit quality metrics look so good, despite the failures of Silicon Valley Bank and Signature Bank last month, according to David George, a banking analyst with Robert W. Baird & Co. Watching these loans is a way to gain at least limited insight into a real estate downturn many analysts expect to get worse before it gets better, as a combination of recession fears and the slow return of workers to post-Covid offices drives expectations of rising office vacancy rates.
“It’s more subjective, but there are regulators at every bank,” he said. “Criticized loans could be paying or performing but a loan could be singled out because of its collateral.”
Not all banks disclose criticized loan growth in earnings reports, and the definition of a criticized asset is more fluid than classifications of whether a loan has missed payments or is otherwise “non-performing,” meaning it has missed payments or violated some other term of the loan deal. A bank’s quarter-end list of criticized assets is developed by a bank itself, under the supervision of bank examiners, according to David Fanger, senior vice president at the bond-rating agency Moody’s Investor Service.
The Federal Deposit Insurance Corp.’s guidelines for such loans say they should be singled out if “well-defined weaknesses are present which jeopardize the orderly liquidation of the debt, [including] a project’s lack of marketability, inadequate cash flow or … the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.”
Bank earnings show modest growth in ‘criticized loans’
So far, reports for the first quarter show only slight growth in criticized loans, even as they move into the spotlight at regional banks and national-level commercial banks like Bank of America and Wells Fargo.
At Bank of America, criticized loans to office building projects rose to $3.7 billion out of $19 billion in office loans. But office buildings represent only a quarter of the bank’s commercial real estate loans, and all CRE is just 7% of the bank’s total loans and leases. So even that ominous-sounding number — 20% of office loans look at least potentially shaky — works out to less than 1% of the bank’s total loans and leases. Bank of America set aside $900 million for potential loan losses in all categories, a truer indication of short-term vulnerability.
“They’re over-reserved,” George said. “It’s almost impossible for us to see office [losses] more than 4 or 5 percent of office loans. They already have reserves for that.”
Wells Fargo, the nation’s biggest commercial real estate lender, according to American Banker, did not disclose its level of criticized loans in its earnings report. A spokeswoman said in an e-mail that the number will be in the bank’s quarterly Securities and Exchange Commission filing. Wells Fargo previously said its criticized loan levels in commercial real estate fell during 2022, but ticked upward in the fourth quarter to $12.4 billion out of $155.8 billion in loans.
Among the most detailed disclosures are those from Huntington Bancshares, a Columbus, Ohio-based regional with $169 billion in assets. Its criticized loans, which include all commercial lending and not just real estate, rose 5% to $3.89 billion. That included upgrades of $323 million in loans to a higher risk rating, and paydowns of $483 million, offset by $893 million in loans newly placed in the “criticized” category. Criticized loans are only 3.5% of Huntington’s total loans and 13 times more than the total of commercial loans that are 30 days past due.
Of Huntington’s $16 billion-plus in commercial real estate loans, none are 90 days past due and only 0.25% of balances are 30 days past due or more. But the 30-days-late category is up from close to zero in late 2022. How big a problem is this? If all of the 30-days-late loans went unpaid and had to be written off, Huntington’s quarterly earnings of $602 million would have dropped by about 7%, or $41 million. The total of all criticized loans compares to 2022 net income of $2.13 billion.
“Our credit quality remains top-tier,” Huntington CEO Stephen Steinour told analysts on its recent earnings call. “Huntington is built to thrive during times like this.”
The story is similar among regional banks generally. PNC, the second-largest regional bank, said criticized real estate loans are now 20% of office loans, because multi-tenant buildings it has lent to are about 25% empty, and 60% of the loans are up for refinancing or repayment by the end of 2024. But only 0.2% of office loans are actually delinquent. “In the near term, this (multi-tenant office) is our primary concern area,” CFO Robert Reilly told analysts. PNC has loan loss reserves of 9.4% of total multi-tenant office loans.
At Cincinnati-based Fifth Third Bancorp, 8.2% of office loans are now criticized, but that represents about 0.1% of the bank’s total loans. Cleveland-based Keycorp said its criticized loans were about 2.8% of its total, up from 2.5% late last year, but that only 0.2% of loans aren’t being paid on time.
“Credit quality remains strong,” Keycorp CEO Christopher Gorman said after its earnings, adding that the company has reduced risk for a decade, including by eliminating most construction loans to office building developers. “We have limited exposure to high-risk areas, such as office, lodging and retail,” he told analysts on the quarterly earnings call.
There is an estimated $1.5 trillion in the commercial real estate refinancing pipeline over the next three years, but Moody’s research shows the portfolios to be well diversified across bank types, and according to a recent analysis from CNBC Pro using Deutsche Bank data, the concentration of CRE risk is smallest at the largest banks, where office loans make up less than 5% of total loans, and are less than 2% on average.
For investors, the key is to look at all the metrics together to manage their own risk, Fanger said. Many, even most, criticized loans will never go bad, he said, since they can be restructured or refinanced, or the office building collateral can be sold to repay some loans. But the newly prominent metric, which he said has been around for years, is the place to look for one version of what could happen down the road.
“There’s a qualitative aspect to any rating,” Fanger said. “We find it a useful measure for the likely direction of risk.”
A “Store Closing” banner on a Bed Bath & Beyond store in Farmingdale, New York, on Friday, Jan. 6, 2023.
Johnny Milano | Bloomberg | Getty Images
Bed Bath & Beyond on Sunday filed for Chapter 11 bankruptcy protection after a series of last-ditch efforts to raise enough equity to keep the business alive failed at the eleventh hour.
“Bed Bath & Beyond Inc.today announced that it and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey to implement an orderly wind down of its businesses while conducting a limited marketing process to solicit interest in one or more sales of some or all of its assets,” a statement Sunday read.
“The Company’s 360 Bed Bath & Beyond and 120 buybuy BABY stores and websites will remain open and continue serving customers as the Company begins its efforts to effectuate the closure of its retail locations.”
Bed Bath has been hanging on by a thread ever since but has refused to go down without a fight. It secured what was then-considered a Hail Mary stock offering in early February that was expected to infuse more than $1 billion in equity into Bed Bath, but the plan faltered and brought in only $360 million, the company said.
At the end of March, Bed Bath announced another stock offering it hoped would bring in $300 million, but that news sent the share price tumbling and it struggled to raise the funds it hoped the offering would provide. As of April 10, the company had sold approximately 100.1 million shares and raised only $48.5 million.
In filings, the company warned if it didn’t raise the anticipated proceeds from the offering, it would likely have to file for bankruptcy protection.
Days after the second stock offering was announced, Bed Bath said it had partnered with liquidator Hilco Global to boost its inventory levels. Under the agreement, Hilco subsidiary ReStore Capital agreed to buy up to $120 million in merchandise from the company’s key suppliers after relationships with Bed Bath’s vendors soured because of its liquidity issues.
However, the plans ultimately proved futile and weren’t enough to keep the lights on.
The retailer has struggled to maintain relationships with its vendors and has been grappling with low inventory levels, lagging sales and a rapidly dwindling cash pile.
Going into the holiday season, Bed Bath had difficulty keeping its shelves stocked and because of its liquidity issues, some vendors began asking for prepayments, the company said in securities filings.
Plus, consumers who had spent 2020 and 2021 staying at home and updating their living spaces amid the pandemic were now spending on travel, eating out and other out-of-home experiences.
In mid-January, the company was looking to find a buyer willing to keep it afloat with an infusion of cash. Soon, though, Bed Bath revealed in a securities filing that it didn’t have enough cash to pay its debts and had defaulted on its credit line with JPMorgan.
The company was able to make its interest payments using funding gained from the first stock offering, but at the time it warned it would “likely” have to file for bankruptcy and see its assets liquidated if the deal didn’t go as planned.
The company had loans with JPMorgan and lender Sixth Street that were reduced in late March after its second stock offering was announced. At the time, its total revolving commitment decreased from $565 million to $300 million and its revolving credit facility was reduced from $225 million to $175 million. Under the reduced credit agreements, Bed Bath was on the hook for monthly interest payments.
The company said it was attempting to lower costs by reducing capital expenditures, closing stores and negotiating lease deals but warned in filings the efforts “may not be successful.”
At a popular Bed Bath outpost in New York City, a since laid-off staffer recently told CNBC that workers were standing around not knowing what to do after the company suddenly cut off in-store pickup and deliveries at the location. The worker was told liquidators would be coming the following day and soon learned employees wouldn’t receive severance after more than two decades with the company.
Investors may have a new way to generate income during economic declines.
Innovator launched a one-of-a-kind suite of barrier ETFs this month that provides protection by purchasing U.S. Treasurys and selling equity options.
“Advisors are realizing that bonds aren’t the safe haven that many thought they would be,” the firm’s CIO, Graham Day, told CNBC’s “ETF Edge” this week. “If you can pair [a barrier ETF] with the fixed income, it offers a tremendous amount of diversification benefits.”
Day said these ETFs remove credit risk while providing daily liquidity.
Protecting against losses up to 10%, 20%, 30% and 40%, the funds provide income distribution rates at around 9%, 8%, 6% and 5%, respectively, according to the company’s website.
This means they’ll produce less income with the more protection they provide. If the fund’s underlying asset experiences losses beyond its set performance level, Day contends investors will still receive quarterly distribution payments — which are based on the premiums of the sold options.
Per Innovator data on defined outcome ETF industry growth, barrier and buffer ETFs have increased from three in August 2018 to 158 in March 2023, with assets under management rising from $100,000 to about $21 billion.
Newcomers in the defined outcome ETF space should not be deterred by the detailed protection the funds offer, said Todd Sohn of Strategas Securities.
“Don’t get too scared of the word ‘option,'” the firm’s managing director said. “If you’re a novice investor, understand that they’re not doing anything too crazy, right? If that was the case, I don’t think the products would be gathering assets too much.”
He finds Innovator’s website does a “great job” of breaking everything down.
“I’d be curious as ETFs continue to grow and the options markets on other funds deepens if they’ll add more suites out there,” Sohn added.
In a statement to CNBC, Sohn wrote he’s not a client of Innovator and doesn’t use these ETFs right now. But he indicates he could see using them in the future.
According to MarketAxess CEO Chris Concannon, there are signs Treasury ETFs are on the cusp of substantial inflows.
“We’re about to see what I’d call [a] bond renaissance,” the electronic-trading platform CEO told CNBC’s “ETF Edge” this week. “The Fed is still taking action, so I would expect bond yields overall to remain relatively high and attractive.”
In late March, the Federal Reserve raised rates by a quarter point — its ninth hike since March 2022. Next Wednesday, Wall Street will get the Fed minutes from the last policy meeting and more clarity on what may come next.
VettaFi vice chairman Tom Lydon sees a similar pattern.
“They’re starting to move back not just into Treasurys, but into corporates and high yields with the idea that we may be able to lock in longer duration and longer payment for those higher rates, [and] with the idea that we’re not going to see higher rates a year from now,” he said.
VettaFi’s latest data finds international and U.S. fixed income exchange-traded funds saw about $45 billion in inflows since the beginning of the year. Meanwhile, it found corporate bond ETFs saw $6 billion in outflows in the first quarter
Lydon speculates the renewed interest is caused by investors losing faith in traditional 60/40 investment portfolios.
“We’ve seen a lot of advisors take a little bit off the table, both in the equity side and the fixed income side,” he said. “So, safety is key until we start to see confidence that the Fed really has some handle on inflation and [there’s] stability in the marketplace.”
As Wall Street gears up for key inflation data, Wells Fargo Securities’ Michael Schumacher believes one thing is clear: “The Fed is not your friend.”
He warns Federal Reserve chair Jerome Powell will likely hold interest rates higher for longer, and it could leave investors on the wrong side of the trade.
“You think about the history over the last 15 years. Whenever there was weakness, the Fed rides to the rescue. Not this time. The Fed cares about inflation, and that’s just about it,” the firm’s head of macro strategy told CNBC’s “Fast Money” on Monday. “So, the idea of lots of easing — forget it.”
The Labor Department will release its January consumer price index, which reflects prices for good and services, on Tuesday. The producer price index takes the spotlight on Thursday.
“Inflation could come off a fair bit. But we still don’t know exactly what the destination is,” said Schumacher. “[That] makes a big difference to the Fed – if that’s 3%, 3.25%, 2.75%. At this point, that’s up in the air.“
He warns the year’s early momentum cannot coexist with a Fed that’s adamant about battling inflation.
“Higher yields… doesn’t sound good to stocks,” added Schumacher, who thinks market optimism will ultimately fade. So far this year, the tech-heavy Nasdaq is up almost 14% while the broader S&P 500 is up about 8%.
Schumacher also expects risks tied to the China spy balloon fallout and Russia tensions to create extra volatility.
For relative safety and some upside, Schumacher still likes the 2-year Treasury Note. He recommended it during a “Fast Money” interview in Sept. 2022, saying it’s a good place to hide out. The note is now yielding 4.5% — a 15% jump since that interview.
His latest forecast calls for three more quarter point rate hikes this year. So, that should support higher yields. However, Schumacher notes there’s still a chance the Fed chief Powell could shift course.
“A number of folks in the committee lean fairly dovish,” Schumacher said. “If the economy does look a bit weaker, if the jobs picture does darken a fair bit, they may talk to Jay Powell and say ‘Look, we can’t go along with additional rate hikes. We probably need a cut or two fairly soon.’ He may lose that argument.”
‘s move to raise equity has depressed its stock and lifted its bonds as investors try to understand the terms of a dilutive and very complex offering.
The troubled retailer, which had said it faced the prospect of bankruptcy if it can’t raise $1.025 billion in the equity offering, said late Tuesday that it completed the deal. That brought in initial gross proceeds of approximately $225 million, while management expects to receive an additional $800 million in future installments, if certain conditions are met.
Bed Bath & Beyond has been in discussions with prospective buyers and lenders as it works to keep its business afloat during a likely bankruptcy filing, according to people familiar with the matter.
The retailer is in the midst a sale process in hopes of finding a buyer that would keep the doors open for both of its major chains, its namesake banner and Buybuy Baby, said the people, who weren’t authorized to discuss the matter publicly.
At the same time, Bed Bath has also been looking for a lender to provide financing that would keep the company going if it were to file for bankruptcy protection in the coming weeks, the people said.
A Bed Bath spokeswoman said Wednesday the company doesn’t comment on specific relationships but has been working with strategic advisers to evaluate all paths to regain market share and enhance liquidity.
“Multiple paths are being explored and we are determining our next steps thoroughly, and in a timely manner,” the spokeswoman said, declining to comment further.
Earlier this month Bed Bath warned it may need to file for bankruptcy after its turnaround plans failed to substantially boost sales and repair its balance sheet. The company reported net losses that exceed $1.12 billion for the first nine months of the fiscal year. It’s blown through its liquidity in recent months, shouldered a heavy debt load, and faced strained relationships with its suppliers.
Comparable sales declined 32% year over year in the most recent fiscal quarter, ended Nov. 26. Company leaders said the company has had a harder time keeping shelves stocked, as vendors change payment terms or decide not to ship merchandise because of the retailer’s financial challenges.
The company has been working to find a route that sees its chains survive, the people added. A day before Bed Bath issued a “going concern” warning, it announced in an employee memo that it had hired Shawn Hummell, a former Macy’s executive, to lead its namesake brand’s retail, store operations and merchandising operations as senior vice president of stores. Prior to his time at Macy’s, Hummell worked for Abercrombie & Fitch, another retailer that underwent a turnaround.
One possible buyer circling Bed Bath is private equity firm Sycamore Partners, according to the people familiar with the discussions. Sycamore is particularly interested in Buybuy Baby, Bed Bath’s banner for infants and toddlers, which has outperformed the broader company. Buybuy Baby has been deemed most likely to survive going forward, the people said.
Still, a sale of Bed Bath as a whole remains on the table — albeit with a much smaller footprint of stores than it currently has, the people said.
Sycamore is known for acquiring retailers, like women’s apparel chain Talbots, including distressed companies that have sought bankruptcy attention like Ascena’s Ann Taylor. A Sycamore Partners spokesperson declined to comment. Dealbook previously reported Sycamore’s interest in Buybuy Baby.
Bed Bath has also drawn interest from companies that acquire the intellectual property, or brands, of companies, particularly those under distress, the people said. Authentic Brands, which has frequented many bankruptcy-run sales for retailers like Forever 21, has also been looking at Bed Bath, the people said. A representative for Authentic Brands didn’t immediately respond to comment.
Short of a sale, the company and its advisors have been looking to nail down additional financing for a bankruptcy filing, which could occur in the coming weeks, the people said. The company’s advisors are looking for a loan of at least $100 million, one of the people said.
Last year, Bed Bath received $375 million in new funding from lender Sixth Street Partners, which has provided financing to other retailers like J.C. Penney and Designer Brands.
Sixth Street’s facility could be converted into bankruptcy financing, the people said, or the lender or others could convert their debt to equity and become Bed Bath’s owner. A representative for Sixth Street didn’t immediately respond to comment.
Bed Bath’s financing strategy comes as fellow retailer Party City sought Chapter 11 protection this week. Also with a hefty debt load, Party City is looking to restructure its balance sheet and move forward with a smaller footprint.
Bankruptcy attorney Eric Snyder from law firm Wilk Auslander said a sale was unrealistic for Bed Bath due to its declining sales and inventory, as well as its expanded losses.
“They don’t have the availability to right the ship, and they don’t have the cash to continue to operate,” Snyder said. “I just don’t see any other option other than a bankruptcy and a liquidation.”
