(Bloomberg) — The decline in the value of office properties is rippling across U.S. banks, with smaller lenders in particular ramping up the use of loan modifications on their commercial real estate books.
Most read from Bloomberg
A Moody’s report found that the typical bank with less than $100 billion in assets modified 0.32% of its CRE loans in the first nine months of the year. This is a significant increase from the first half of 2024, when it was only about 0.1%.
But it’s also a much smaller proportion than what other types of lenders adjusted: for mid-sized banks, the share was 1.93% in the first nine months, and for the largest, it was 0.79%, the report found. The difference may not be because smaller lenders made better loans, but rather because they were slower to respond to falling commercial real estate prices.
Modifications are typically requested by distressed landlords looking to defer payments and obtain short-term loan extensions. Their increasing use is the latest sign of growing distress in CRE credit as a wave of loans come due for refinancing.
Much of the focus is on regional banks, which are considered particularly vulnerable because they often received lower down payments than their larger counterparts in the years before interest rate hikes began in 2022. This means they have less in reserve before… Take losses fell after the value of office and apartment complexes fell by at least 20% since the peak.
Meanwhile, large U.S. banks, which are subject to stress tests and other forms of intense regulatory scrutiny, have so far set aside more money to cover bad loans than smaller banks, according to Rebel Cole, a finance professor at the University of Florida. Atlantic University, which also advises Oaktree Capital Management LP.
Concerns about future losses have contributed to weak stock price performance for smaller banks, with the KBW Regional Banking Index up about 17% this year compared with about 30% for the KBW Nasdaq Global Bank Index.
About $500 billion in mortgage mortgages will mature next year, “and a significant portion of them will default,” said Cole of Florida Atlantic University. “There will be sales on the cheap. They will put more downward pressure on commercial property prices across the board.
Federal Deposit Insurance Corp. Chairman Martin Gruenberg warned Thursday that vulnerabilities in some of the banking system’s loan portfolios, including office and multifamily, still warrant close monitoring.
Office loans will plague public REITs, mortgages and the vast majority of banks for a long time to come, Mike Comparato, president of Franklin BSP Realty Trust Inc., told analysts last month. These assets are trading at levels that would have been unfathomable a few years ago. We are also hearing tales of lenders unwilling to take ownership of office assets to avoid market realities.
Adding to lenders’ woes, interest rate cuts this year by the Federal Reserve have not flowed into lowering long-term borrowing costs. This makes it more difficult for landlords to refinance their debt to a level that can be covered by rental income.
“We’re starting to see some capitulation,” said Robin Potts, chief investment officer of the real estate unit at investment firm Canyon Partners LLC. “Borrowers who don’t make payments can’t extend their payments forever.”
-
Insurance brokerage Arthur J. Gallagher led dozens of companies selling billions of dollars in bonds and loans in the United States, looking to capitalize on surging investor demand before markets close for the year. High-quality sales totaled $18 billion, while leveraged loans saw $75 billion in launches.
-
Some asset managers earn returns in fixed maturity funds by purchasing bonds that do not have any fixed redemption dates.
-
PF Chang’s restaurant chain China Bistro Inc wants to ease short-term debt pressures by extending the maturity of a loan due in 2026, a move that could help improve its credit rating.
-
Kroger Co. has become the latest company that may have to buy back debt from investors after judges blocked its attempt to buy Albertsons.
-
Thames Water is offering sweeteners to its major creditors in exchange for their support for its plan to raise £3 billion ($3.8 billion) in emergency cash.
-
Retailers Party City and Container Store, as well as prison phone company Aventiv Technologies, are considering bankruptcy.
-
As India’s growing wealth fuels demand for long-term savings products, a group of investors is demanding that the Reserve Bank of India allow state government debt to be converted into zero-coupon bonds.
-
Sinclair and some of its lenders are floating a proposal to raise more than $1 billion in new financing to pay down some of its debt, according to people familiar with the situation.
-
Australia’s financial regulator has pushed ahead with plans to become the first country to phase out the type of securities that were eliminated at Credit Suisse last year.
-
Mars Inc. seeks to raise at least $1 billion through the sale of private debt before its acquisition of food maker Kellanova. The company is separately preparing the sale of investment-grade bonds to help finance the acquisition.
-
Altice France and a group of secured creditors remain at loggerheads over the terms of a deal to reduce the company’s 23.7 billion euros ($24.9 billion) debt pile, including the amount billionaire shareholder Patrick Drahi must give up.
-
RBC Capital Markets has appointed Michael Hoff as Head of US Leveraged Finance and Mark Bibby as Co-Head of US Leveraged Capital Markets alongside John Root.
-
Edmond de Rothschild Asset Management has appointed Vianney Hocquet as a hybrid corporate debt portfolio manager.
-
Mesirow Financial has appointed Jason Handrenos as senior managing director and global head of fixed income sales and growth for the firm’s institutional sales and trading team.
Most read from Bloomberg Businessweek
©2024 Bloomberg L.P