Tag: ratehikes

Watch this ‘canary in the coal mine’ for signs of trouble in markets, Neuberger Berman CIO says

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Neuberger Berman, an asset manager with eight decades under its belt, is on the lookout for cracks in credit markets from the Federal Reserve’s rate-hiking campaign.

Erik Knutzen, chief investment officer of multi asset, worries that several factors could be a tipping point for the economy, from an economic slowdown in China to U.S. consumers finally becoming exhausted by higher rates.

Yet Knutzen expects the high-yield, or junk bond, market to serve as the “canary in the coal mine” for broader market volatility, acting as “perhaps the most visible threat, and therefore one we think could be priced in sooner than later.”

The Bloomberg U.S. High Yield Bond Index has returned 6.4% through the end of August, producing one of the year’s highest gains in fixed income, helped along by a “resilient U.S. economy coupled with still-available financial liquidity,” according to the Wells Fargo Investment Institute.

But Knutzen worries that as the high-yield maturity wall draws closer, “the first policy rate cuts get priced further and further out, raising the threat of expensive refinancings.”

The 10-year Treasury yield’s
BX: TMUBMUSD10Y
climb to a multidecade high in August of almost 4.4% left many major U.S. corporations in early September hesitant to borrow beyond 10 years.

Starting next year, some $700 billion of high-yield bonds are set to mature through the end of 2027, with a big slice of the refinancing need coming from companies with riskier credit ratings below the top BB ratings bracket.

The junk-bond maturity wall.

Bloomberg, Wells Fargo Investment Institute, Moody’s Investors Service

The two big U.S. exchange-traded funds linked to junk bonds are the SPDR Bloomberg High Yield Bond ETF
JNK
and the iShares iBoxx $ High Yield Corporate Bond ETF
HYG,
both up 1.8% and 1.5% on the year through Monday, respectively, while offering dividend yields of more than 5.8%, according to FactSet.

Of note, fixed-income strategists at the Wells Fargo Investment Institute also said they see risks emerging in junk bonds for companies rated B and below, particularly with spread in the sector trading less than 400 basis points above the risk-free Treasury rate since July. Spreads are the premium that investors are paid on bonds to help compensate for default risks.

Top corporate executives appear hopeful that the Federal Reserve will cut rates sooner than later. Fed Chairman Jerome Powell said in Jackson Hole, Wyo., in August that the central bank is prepared to keep its policy rate restrictive for a while to get inflation down to its 2% target.

To that end, Neuberger Berman, which has roughly $443 billion in managed assets, sees several sources of volatility lurking through year’s end, and has a “defensive inclination” in equity and credit, favoring high-quality companies with plenty of free cash flow, high cash balances and less expensive long-term debt.

U.S. stocks booked gains on Monday after a week of losses, with the S&P 500 index
SPX
and Nasdaq Composite Index
COMP
scoring their best daily percentage gains in about two weeks. The Dow Jones Industrial Average
DJIA
advanced 0.3%.

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September 11, 2023
‘San Francisco is not dead’: Not everyone is shunning the city’s reeling office market

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Barry DiRaimondo, chief of SteelWave, a West Coast property developer that in the past half-century has partnering with many of the biggest names in commercial real estate, is looking for diamonds in the rough, distressed office properties located in the American city that many have given up on.

Others may be shunning San Francisco while it’s down on its luck, but DiRaimondo sees better days ahead, despite the city’s threat of a growing deficit, its fentanyl crisis, homelessness and a reluctant return of office workers to its financial core.

“Not much is coming up right now,” DiRaimondo said of buying opportunities, while speaking from his office in the heart of San Francisco’s financial district. But he was eager to point out several nearby buildings that could be candidates to buy, at the right price.

“I think over the next 12 to 18 months, you’re going to see a tsunami,” of distressed office properties, DiRaimondo said.

Like in many big cities, a wave of office buildings bought at peak prices before the pandemic now have a pile of debt coming due, at much higher rates. But San Francisco’s financial core only recently has begun to show flickers of hope in its weak recovery post-COVID.

“Whether it’s San Francisco, Oakland or anywhere here, and your debt is rolling, you’re having a conversation with your lender,” DiRaimondo said. “There’s either a restructuring going on or a foreclosure going on.”

A number of high-profile property owners this year surrendered local properties to lenders, including Westfield’s namesake shopping center downtown and a string of well-known hotels, a blow to the city’s comeback efforts.

Still, DiRaimondo expects the bulk of property ownership transfers in this boom-and-bust cycle to take place quietly, behind the scenes, often through a building’s debt changing hands. It’s a familiar playbook for veteran real-estate developers like SteelWave and its partners, especially when San Francisco office property values tumble and new loans remains expensive and hard to come by.

“Office is a nasty word, right now. Especially tech office,” he said. “We are doing something that’s a bit different.”

Booms, busts

San Francisco’s history as a boom-and-bust town perhaps is best suited for real-estate developers able to take a bunch of lemons and make lemonade.

That has been SteelWave’s signature move in the notoriously rough-and-tumble commercial real-estate industry, through its ups and downs. It has bought over $17.5 billion in properties and developments in the past five decades, first under the Legacy Partners Commercial brand before it was renamed in 2015.

It has partnered with some of the biggest names in commercial real estate, including with Angelo Gordon & Co. in 2021 on two Silicon Valley office buildings, but also distressed debt titans that include Rialto Capital, and with Chenco, one of the largest Chinese-owned U.S. real-estate investment firms.

Its stronghold is the Bay Area and DiRaimondo is now looking to raise a $500 million fund to buy distressed buildings, including in downtown San Francisco, a place major Wall Street lenders have been backing away from for months.

“It’s hard to raise equity to buy this stuff right now,” he said, but argues his strategy, which includes expanding its reach to potential investors in the U.A.E., Israel and parts of Europe, will pan out.

SteelWave’s model of buying a property includes a final tally of costs often three to four times the initial purchase price, due to extensive overhauls.

“Typically, what we do is buy something, tear it apart, put it back together, lease it, sell it,” DiRaimondo said.

It’s niche in the distressed world that’s already produced overhauls of buildings from Seattle to Colorado to Los Angeles, places the tech industry wants to lease.

In the southern California town of Costa Mesa, that meant partnering with Invesco to turn an old newsroom and printing press for the Los Angeles Times into a creative work campus. An opinion piece in 2022 from the newspaper described the revamp as turning, “the glum newspaper architecture into something inviting.”

Forget being a ‘rent bandit’

“In New York, people rushed back and refilled the apartments, streets, and subways. Restaurants and stores flooded with customers again,” a team from Moody’s analytics wrote in a recent “tale of two cities” report. “San Francisco, on the other end, battled safety concerns, homelessness, and population exodus which existed before but only became more obvious with barren neighborhoods.”

SteelWave thinks the old days of landlords raking in top-dollar commercial rents in San Francisco, while adding little back to office buildings, are a thing of the past.

“You have to have owners who want to create cool work environments to attract people back into the city,” DiRaimondo said of downtown San Francisco’s long slog back from the brink.

That means buying properties at low prices, but also risking putting money down for major improvements. He isn’t a distressed investors looking to become a “rent bandit,” he says, because the strategy will fail to get quality tenants.

Like the Moody’s team, DiRaimondo thinks San Francisco eventually will bounce back, but he thinks not before reality hits older office properties.

Take a “commodity” building downtown, often older and midblock with generic features, that previously might have been worth $750 to $800 a square foot. It now looks worth less than $300 a square foot, he said.

The early stages of fire-sales have begun already, with the 22-story tower at 350 California, nearby to DiRaimondo’s office, reportedly fetching $200 to $225 a square foot.

“San Francisco is not dead,” DiRaimondo said. “I think there are opportunities in San Francisco.”

See: San Francisco’s office market erases all gains since 2017 as prices sag nationally

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August 14, 2023
‘San Francisco is not dead’: Not everyone is shunning the city’s reeling office market

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Barry DiRaimondo, chief of SteelWave, a West Coast property developer that in the past half-century has partnering with many of the biggest names in commercial real estate, is looking for diamonds in the rough, distressed office properties located in the American city that many have given up on.

Others may be shunning San Francisco while it’s down on its luck, but DiRaimondo sees better days ahead, despite the city’s threat of a growing deficit, its fentanyl crisis, homelessness and a reluctant return of office workers to its financial core.

“Not much is coming up right now,” DiRaimondo said of buying opportunities, while speaking from his office in the heart of San Francisco’s financial district. But he was eager to point out several nearby buildings that could be candidates to buy, at the right price.

“I think over the next 12 to 18 months, you’re going to see a tsunami,” of distressed office properties, DiRaimondo said.

Like in many big cities, a wave of office buildings bought at peak prices before the pandemic now have a pile of debt coming due, at much higher rates. But San Francisco’s financial core only recently has begun to show flickers of hope in its weak recovery post-COVID.

“Whether it’s San Francisco, Oakland or anywhere here, and your debt is rolling, you’re having a conversation with your lender,” DiRaimondo said. “There’s either a restructuring going on or a foreclosure going on.”

A number of high-profile property owners this year surrendered local properties to lenders, including Westfield’s namesake shopping center downtown and a string of well-known hotels, a blow to the city’s comeback efforts.

Still, DiRaimondo expects the bulk of property ownership transfers in this boom-and-bust cycle to take place quietly, behind the scenes, often through a building’s debt changing hands. It’s a familiar playbook for veteran real-estate developers like SteelWave and its partners, especially when San Francisco office property values tumble and new loans remains expensive and hard to come by.

“Office is a nasty word, right now. Especially tech office,” he said. “We are doing something that’s a bit different.”

Booms, busts

San Francisco’s history as a boom-and-bust town perhaps is best suited for real-estate developers able to take a bunch of lemons and make lemonade.

That has been SteelWave’s signature move in the notoriously rough-and-tumble commercial real-estate industry, through its ups and downs. It has bought over $17.5 billion in properties and developments in the past five decades, first under the Legacy Partners Commercial brand before it was renamed in 2015.

It has partnered with some of the biggest names in commercial real estate, including with Angelo Gordon & Co. in 2021 on two Silicon Valley office buildings, but also distressed debt titans that include Rialto Capital, and with Chenco, one of the largest Chinese-owned U.S. real-estate investment firms.

Its stronghold is the Bay Area and DiRaimondo is now looking to raise a $500 million fund to buy distressed buildings, including in downtown San Francisco, a place major Wall Street lenders have been backing away from for months.

“It’s hard to raise equity to buy this stuff right now,” he said, but argues his strategy, which includes expanding its reach to potential investors in the U.A.E., Israel and parts of Europe, will pan out.

SteelWave’s model of buying a property includes a final tally of costs often three to four times the initial purchase price, due to extensive overhauls.

“Typically, what we do is buy something, tear it apart, put it back together, lease it, sell it,” DiRaimondo said.

It’s niche in the distressed world that’s already produced overhauls of buildings from Seattle to Colorado to Los Angeles, places the tech industry wants to lease.

In the southern California town of Costa Mesa, that meant partnering with Invesco to turn an old newsroom and printing press for the Los Angeles Times into a creative work campus. An opinion piece in 2022 from the newspaper described the revamp as turning, “the glum newspaper architecture into something inviting.”

Forget being a ‘rent bandit’

“In New York, people rushed back and refilled the apartments, streets, and subways. Restaurants and stores flooded with customers again,” a team from Moody’s analytics wrote in a recent “tale of two cities” report. “San Francisco, on the other end, battled safety concerns, homelessness, and population exodus which existed before but only became more obvious with barren neighborhoods.”

SteelWave thinks the old days of landlords raking in top-dollar commercial rents in San Francisco, while adding little back to office buildings, are a thing of the past.

“You have to have owners who want to create cool work environments to attract people back into the city,” DiRaimondo said of downtown San Francisco’s long slog back from the brink.

That means buying properties at low prices, but also risking putting money down for major improvements. He isn’t a distressed investors looking to become a “rent bandit,” he says, because the strategy will fail to get quality tenants.

Like the Moody’s team, DiRaimondo thinks San Francisco eventually will bounce back, but he thinks not before reality hits older office properties.

Take a “commodity” building downtown, often older and midblock with generic features, that previously might have been worth $750 to $800 a square foot. It now looks worth less than $300 a square foot, he said.

The early stages of fire-sales have begun already, with the 22-story tower at 350 California, nearby to DiRaimondo’s office, reportedly fetching $200 to $225 a square foot.

“San Francisco is not dead,” DiRaimondo said. “I think there are opportunities in San Francisco.”

See: San Francisco’s office market erases all gains since 2017 as prices sag nationally

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August 14, 2023
Problem office loans are piling up in Chicago and Houston, but not yet in San Francisco

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Key-card swipes don’t tell the whole story.

Chicago, Philadelphia and Houston have some of the highest percentages of problem office loans when looking at delinquency rates and other early warnings signs of trouble, according to a new report by Barclays.

That might come as a surprise, given that San Francisco has been making headlines for its broader commercial real estate woes, technology sector layoffs and struggles getting workers back to the office.

But so far, it’s other cities like Philadelphia with a 14% rate of office loans at least 30 days delinquent (see chart), or Chicago where 21.2% of its office loans facing imminent default, triggering a transfer of their debt to a “special” loan servicer (Sp. Srv).

Chicago, Houston and Philadelphia are top cities for trouble office loans

Trepp, Barclays Research

Researchers at Barclays based their findings on the performance of commercial property debt in metro areas with at least $2 billion of loans that were packaged into bond deals. They found that, “although there has been much discussion linking issues in the office sector with the very slow pace of return-to-office policies, we see very little correlation between performance of office collateral within various MSAs and Kastle’s weekly occupancy report.”

Kastle’s most recent Back to Work Barometer showed Houston with a 61.6% rate of physical occupancy, above the 50% 10-city average. San Jose’s rate was pegged at below 39%, while the San Francisco metro area was near 45%, when looking at card swipes at more than 2,000 office buildings in 138 cities.

But San Jose and Seattle were outperforming, both with no office loan delinquencies, few specially serviced loans or those on a watchlist for potential problems, according to Barclays.

“Given that tech companies have pulled back from office occupancy and many have embraced remote work, we believe that office delinquencies will continue to rise,” wrote Lea Overby’s credit research team at Barclays, in a Tuesday client note.

While Wall Street’s bond machine, known as the “commercial mortgage-backed securities (CMBS)” market, isn’t the biggest lender on U.S. office buildings, it’s the most transparent place to track loan performance in commercial real estate, because of its monthly public reporting requirements.

Another caveat to the findings is that physical occupancy rates aren’t the same as in-place leases, which many companies continued to pay each month throughout the pandemic. Physical occupancy rates, however, can be a sign of tenant demand for future space.

Higher interest rates, a mountain of maturing property debt and wobbling building prices have been pressuring landlords, with both Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen recently saying they continue to monitor the sector closely.

Stocks were lower Tuesday, as investors awaited Chair Powell’s two days of testimony to Congress, with the Dow Jones Industrial Average
DJIA,
-0.72%
off 200 points, or 0.6%, the S&P 500 index
SPX,
-0.47%
off 0.4% and the Nasdaq Composite Index
COMP,
-0.16%
0.2% lower, according to FactSet.

Related: Blackstone wrote down its stake in this Chicago office building to $0. Now it’s talking with lenders on the debt coming due

The S&P 500 Office REITs Sub-Industry Index
SP500.40402040,
-3.43%
was down 1.1% Tuesday, but off 21% on the year so far, according to FactSet.

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June 20, 2023
Why this $6 trillion pile of cash isn’t heading for stocks any time soon

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Even with U.S. stocks in a new bull market, investors aren’t showing many signs of backing away from money-market funds and other cash-like investments offering yields of about 5%, the highest in about 15 years.

Money-market funds hit a record of $5.9 trillion in assets as of Tuesday, signaling a continuing drain out of bank deposits into higher-yielding “cash-like” investments, according to Peter Crane, president and publisher of Crane Data.

He…

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June 14, 2023
‘This is a risk confronting all banks,’ ex-FDIC chief Sheila Bair tells MarketWatch

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Regional banks shouldn’t be the only source of worry for potential fallout from the Federal Reserve’s rapid pace of interest-rate hikes in the past year, said a former top banking regulator.

“I don’t see regional banks as having any particular problem,” said Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, in an interview with MarketWatch on Thursday. “We need to be mindful of all unmarked securities at banks — small, medium and large.”

Bair called the hyperfocus on regional banks and interest-rate risks “counter productive” in the wake of the collapse earlier in March of Silicon Valley Bank and Signature Bank
SBNY,
-22.87%
of New York.

“This is a risk confronting all banks,” she said. “All examiners need to be on alert for how interest-rate risk is being managed. If there is a run, they will need to sell these securities. Those are the kinds of things all-size banks, and all examiners should be worried about.”

A run on deposits at Silicon Valley Bank snowballed after it disclosed a $1.8 billion loss on a sudden sale of $21 billion worth of high-quality, rate-sensitive mortgage and Treasury securities. It was the biggest U.S. bank failure since Washington Mutual’s collapse in 2008.

The FDIC estimated that U.S. banks had some $620 billion of unrealized losses from securities on their books as of the end of 2022, including longer-duration Treasurys and mortgage securities that have become worth less than their face value.

“Unrealized losses on securities have meaningfully reduced the reported equity capital of the banking industry,” FDIC Chairman Martin Gruenberg said on March 6, in a speech at the Institute of International Bankers.

Days after that gathering, Silicon Valley Bank and Signature Bank both collapsed, prompting regulators to roll out a new emergency bank funding program to help head off any liquidity strains at other U.S. lenders. Regulators also backstopped all deposits at the two failed lenders.

Bair earlier this month argued that if U.S. banking authorities see systemic risks they should go to Congress and ask for a backstop against uninsured deposits, beyond the standard $250,000 cap per depositor, at a single bank. Specifically, she wants zero-interest accounts, or those used for payroll and other operational expenses, to be fully covered, as was the case for a few years in the wake of the global financial crisis to stop runs on community banks.

Treasury Secretary Janet Yellen said Wednesday that blanket deposit insurance protection isn’t something her department is considering, but added that the appropriate level of protection could be debated in the future.

Fed Chairman Jerome Powell on Wednesday said the U.S. banking system “is sound and resilient, with strong capital and liquidity,” after hiking rates by another 25 basis points to a range of 4.75% to 5%, up from almost zero a year ago.

See: Fed hikes interest rates again, pencils in just one more rate rise this year

Bair has been calling for a pause on Fed rate hikes since December. She said that instead of raising rates by another 25 basis points on Wednesday, Fed Chair Powell should have hit pause and said the central bank needs time to assess.

“If we have a financial crisis, we won’t have a soft landing,” Bair said. “We have to avoid that at all costs.”

Read: Bank failures like SVB are a reminder that ‘risk-free’ assets can still wreck portfolios

Stocks closed modestly higher Thursday in choppy trade, with the Dow Jones Industrial Average
DJIA,
+0.23%
up 0.2% and S&P 500 index
SPX,
+0.30%
advancing 0.3%, while the Nasdaq Composite Index
COMP,
+1.01%
gained 1%.

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March 23, 2023
SVB Financial bonds sink to 31 cents on the dollar after failure of Silicon Valley Bank

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Heavy trading in SVB Financial Group’s
SIVB,

debt pulled its BBB-rated 10-year bonds as low as 31 cents on the dollar on Friday after subsidiary Silicon Valley Bank was closed by regulators, marking the biggest bank failure since the financial crisis.

The Santa Clara, Calif.–based financial-services company has been reeling in recent days, with both its stock and bond prices hit hard, after it on Thursday disclosed a $1.8 billion loss from a sale of about $21 billion in securities.

Its bond prices lost further ground Friday after the California Department of Financial Protection and Innovation closed Silicon Valley Bank, placing the Federal Deposit Insurance Corp. in control of its assets.

Silicon Valley Bank had an estimated $209 billion in total assets and about $175.4 billion in deposits as of Dec. 31, according to the FDIC.

SVB Financial’s 4.57% bonds due April 2023 traded as low as 31 cents on the dollar on Friday in heavy trading, according to BondCliq. Since the low, the debt traded up to 38.50 cents. A week ago it was fetching 90 cents. Prices on U.S. corporate bonds below 70 cents on the dollar are broadly considered distressed.

Worries about distress at Silicon Valley Bank, and potential risks in the broader distress in the banking system, have weighed on shares and the debt of financial companies.

Bonds in the financial sector were broadly under pressure Friday, including debt issued by Bank of America Corp.
BAC,
-0.97%,
JPMorgan Chase and Co.
JPM,
+2.70%,
Goldman Sachs Group Inc.
GS,
-3.69%,
Morgan Stanley
MS,
-1.56%
and other major banks, according to BondCliq.

Shares of the Invesco KBW Bank ETF
KBWB,
-3.26%
were down 16% on the week through midday Friday, with some investors expressing concern about potential cracks in the financial system following a year of aggressive interest-rate hikes by the Federal Reserve.

Barclays analysts said Friday that they viewed the collapse of Silicon Valley Bank as an “isolated event, but that it still “raises risks of broader distress within the banking system” that could throw cold water on talk of a Fed interest-rate hike in March of 50 basis points vs. 25 basis points.

“Indeed, the possibility of capital losses at other institutions cannot be completely dismissed, with rising policy rates raising banks’ funding costs, more elevated longer-term rates exerting pressure on asset valuations, and potential loan losses related to idiosyncratic credit exposures.”

Shares of SBV Financial were halted Friday, but they are down about 54% on the year, according to FactSet. The S&P 500 index
SPX,
-1.11%
was down about 1.2% Friday afternoon, while the Dow Jones Industrial Average
DJIA,
-0.82%
fell 0.8% and the Nasdaq Composite
COMP,
-1.47%
was 1.7% lower.

Deep Dive: 10 banks that may face trouble in the wake of the SVB Financial Group debacle

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March 10, 2023