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Canada’s Largest Bank Is Amongst First Victims Of Mortgage Debt Crisis (#GotBitcoin?)

Canada’s largest bank by assets is moving to protect itself as pain spreads through the mortgage market. Canada’s Largest Bank Is Amongst First Victims Of Mortgage Debt Crisis (#GotBitcoin?)

The Royal Bank of Canada RY 5.89% moved Wednesday to unload hundreds of millions of dollars worth of commercial real-estate debt seized from clients in recent days, trying to protect itself from pain spreading through the mortgage market.

RBC, Canada’s largest bank by assets, was seeking bids Wednesday for more than $600 million of debt tied to commercial mortgages, according to people familiar with the matter. In a sign of how quickly the market is deteriorating and the pressure institutions feel to quickly deal with the situation, the bank is expected to choose a buyer by the end of the day.

Mortgage bonds of all kinds have tumbled in value in recent weeks, even those that had top ratings from credit agencies. Investors are worried borrowers will default en masse as the economy slows to a halt.

That has prompted margin calls from banks that lend against these bonds. Borrowers can either try to sell the debt themselves at fire-sale prices or post more collateral to buy time—or the lender can seize the bonds and try to sell them itself.

That is what RBC is doing. Among the collateral the bank is auctioning are mortgages that had been owned by AG Mortgage Investment Trust, a real-estate investment trust operated by New York investment firm Angelo, Gordon & Co., one of the people said.

The RBC sale involves nearly $11 million of commercial mortgage bonds held by AG, the company said.

AG filed a lawsuit against RBC on Wednesday to stop the sale, accusing the bank of taking advantage of turmoil in the mortgage market to apply “opportunistic (and unfounded) markdowns” of mortgage assets to trigger margin calls and seize the collateral, according to the suit.

“Recognizing the aberrant state of the markets, most banks have stopped short of taking precipitous steps that could push the [mortgage REIT] industry into the abyss,” according to the suit, which calls RBC an “outlier bank…that has not stopped short but is instead hitting the accelerator.”

AG warned the move would “have a cascading effect in the market for mortgage-based assets, and potentially the entire U.S. economy.”

A spokesman for RBC declined to comment.

AG Mortgage said Monday it was having trouble meeting margin calls from its lenders, followed in short order by mortgage funds run by TPG, the private-equity giant Invesco Ltd. and others. Shares of these publicly listed funds and others have plummeted as the novel coronavirus has spread.

Some banks have discussed forbearance measures, which would give these mortgage investors time to improve their health.

RBC is opting not to wait. It is a sign that banks, despite being in far stronger shape than they were in the 2008 financial crisis, are warily watching their loan books for trouble signs. Companies are quickly tapping their credit lines, requiring banks to come up with billions of dollars of cash quickly. What’s more, rules put in place since the last downturn require banks to quickly refill depleted coffers.

Adding, perhaps temporarily, to the problem is that banks will close their quarterly books on March 31. Even in normal markets, banks typically try to pare risk ahead of a quarter-end by selling loans and shoring up their collateral.

Publicly traded U.S. companies have drawn down at least $100 billion from banks in recent weeks, according to S&P Global. Some private-equity firms have encouraged their own portfolio companies to do the same, putting additional strain on banks’ balance sheets.

Goldman Sachs Group Inc. analysts estimate that large, regional and trust banks have $2.6 trillion in unfunded commercial-loan commitments on their books, including half a trillion to companies in particularly hard-hit sectors such as energy, transportation and retail.

If those loans were entirely drawn, the biggest lenders’ capital ratios would fall below certain regulatory minimums, Goldman said, but added that any stress should be eased now that banks are able to more easily borrow directly from the Federal Reserve.

Josh Barber, an analyst at mutual fund Diamond Hill Capital Management in Columbus, Ohio, who focuses on real estate, said he expects banks to negotiate with borrowers or take other steps in the days ahead.

“I think this will happen with things like hotel or movie-theater loans that are going to have issues,” he says. “Lenders will require more margin, maybe more interest or better lender terms, and probably some dividend cuts for the mortgage REITs, even temporarily.”

Updated: 3-25-2020

Why The Commercial Mortgage Bond Market Looks Dire Right Now

Volatility is extreme, sellers are trying to sell.

Commercial real estate was supposed to be one of the safer bets of the past decade.

But the coronavirus has turned the whole notion of “safety” on its head, emptying streets, stores, hotels, office buildings and other shared spaces, as cities race to slow its spread. Uncertainty has left creditors bracing for an avalanche of missed payments.

How dire is it? Real estate appraisers aren’t likely to see buildings in person for weeks, or maybe even months from now, so unlike the deluge of expected worker layoffs, any actual markdown to real-estate values remains a long way off.

But carnage, like in the corporate debt markets, already can be found in commercial property bond prices where two weeks of dysfunction, margin calls and asset liquidations have taken a toll, particularly for investors buying bonds or making loans using borrowed money, called leverage.

“It’s a wonder to me that more people aren’t more careful with leverage, because that’s always been a killer in an environment like this,” Christopher Sullivan, a portfolio manager at the United Nations Federal Credit Union in New York, told MarketWatch on Wednesday.

“This is a true black swan event,” he said of the pandemic. “But market players also have made very little accommodation for the likelihood of it happening.”

And by one important measure — bond bid lists — there are still parties out there looking to raise cash, reduce their risk or simply dump swaths of exposure.

Wall Street dealers on Wednesday were circulating a nearly $2.1 billion list of mostly lower-rated commercial mortgage bonds under the title “liquidation” in the hopes of attracting bids.

The “talk,” or a rough guess of what dealers think the bonds might fetch, ranged from $20 prices to $90 prices, according to the list viewed by MarketWatch. Without defaults, bonds mostly repay at $100 prices.

U.S. stocks on Wednesday saw a bit more reprieve from expectations that Congress will soon pass into law a near $2 trillion aid package to offset the coronavirus outbreak fallout, with the Dow Jones Industrial Average DJIA, +2.39% finishing the day up 2.4%.

Tom Barrack, chief executive of Colony Capital Inc, warned in a weekend post of a “domino effect” of margin calls, foreclosures and borrower defaults in the nearly $16 trillion U.S. commercial real estate debt market from the “invisible enemy” of COVID-19, the disease caused by the coronavirus.

Importantly, unlike corporate bonds, most commercial property bonds are not yet eligible for sweeping rescue facilities rolled out this month by the Federal Reserve to help restore order to rattled financial markets.

The hope is for a broader backstop soon, particularly since commercial real estate bonds could be vulnerable to a wave of downgrades, as they were a decade ago, if credit conditions stay stressed and property owners start defaulting.

Like a decade ago, shares of publicly traded mortgage companies that rely on leverage to boost their lending and bond-buying capacities have been punished, sometimes by taking $1 worth of assets and turning it into as much as $15 by borrowing $14.

But recent record bond outflows have stung money managers too.

Deutsche Bank analysts led by Ed Reardon found that money managers far outpaced others in terms of offering “for sale” bonds on Wall Street’s bid lists over the past two weeks.

Here’s their chart showing the nearly $10 billion surge in commercial mortgage bonds offered on bond bid lists during the first three weeks of March.

“Last week, most of the lists weren’t even getting bids,” said Adam Murphy, founder of Empirasign, a platform that tracks bond-trading activity. He also said that some sellers this week instead are turning to “all-or-nothing” lists.

“The reason for that can be twofold,” he said. “Either you get a margin call and need to liquidate multiple positions simultaneously. Or it’s people trying to find a more expedient method of transacting.”

 

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