A CMBS is a commercial mortgage backed security, a package of commercial mortgages. A big one will soon default, which is how credit crises get started. If this one doesn’t kick the crisis into high gear, another will, and soon. From Tyler Durden at zerohedge.com:
Over the past 6 months we have repeatedly discussed the plight of commercial real estate which unlike most other financial assets, failed to benefit from a Fed bailout or backstop (but that may soon change). It culminated in June when we wrote that the “Unprecedented Surge In New CMBS Delinquencies Heralds Commercial Real Estate Disaster.” The ongoing crisis in structured debt backed by commercial real estate in general and hotel properties in particular, prompted Wall Street to launch the “Big Short 3.0“ trade: betting against hotel-backed loans, which had the broadest representation in the CMBX 9 index, whose fulcrum BBB- series has continued to slide even as the broader market rebounded.
Yet while prominent failures within the CMBS universe had so far been rare due to overcollateralization of even highly distressed portfolios, as the economic slump drags on, as various stimulus measures expire and as landlords fail to make rent payment, the various embedded liquidity buffers have been rapidly draining and as a result we are now approaching the moment where one or more prominent names are about to suffer a spectacular blow up.
The first among them will almost certainly be the Starwood Retail Property Trust 2014-STAR, a portfolio which is backed by an almost $700 million defaulted loan which is collateralized by several malls – including The Mall at Wellington Green in Florida – owned by Barry Sternlich’s Starwood Capital, and whose investors are starting to take losses according to Bloomberg, after the Covid-19 pandemic shuttered stores, crippled rental payments and wiped out emergency cash reserves that had been keeping interest payments flowing.
A big reason for the devastation is that The Mall at Wellington Green, the core property of the portfolio and Wellington’s biggest taxpayer, saw its taxable value drop 32% in 2019 to $150 million as a result of the Nordstrom departure, according to the Palm Beach County Property Appraiser’s Office. Starwood Retail Partners bought the property in 2014 for $341.1 million, marking the largest real estate deal ever recorded in the county at the time. It is now worth less than half, and that’s before most of its other anchor clients also fled or filed for bankruptcy.
Endless money for deeply indebted companies that have no prospect of making a profit is not a feature of capitalism. From Wolf Richter at wolfstreet.com:
By Wolf Richter. This is the transcript of my podcast last Sunday, THE WOLF STREET REPORT. You can listen to it on YouTube, and you can find it on Apple Podcasts, Spotify, Stitcher, Google Podcasts, iHeart Radio, and others.
Through the first half of August – which is normally a quiet period for the bond market in the US – a total of $56 billion in junk bonds and leveraged loans were issued by junk-rated companies, according to S&P Global. That was nearly 50% higher than the prior records for the same period in 2012 and 2016, and more than double the amount issued in the entire month of August last year.
The Fed’s announcement on March 23rd that it would start buying corporate bonds and bond ETFs set off a huge rally in the bond market, including in the junk-bond market.
The rally started before the Fed ever actually bought the first bond. And then the Fed hardly bought anything by Fed standards. Through the end of July, it bought just $12 billion in corporate bonds and bond ETFs, including a minuscule $1.1 billion in junk bond ETFs. It’s not even a rounding error on its $7-trillion mountain of assets.
But the announcement was enough to trigger the biggest junk-debt chase in the shortest amount of time the world has likely ever seen. And it kept the zombies walking, and it generated a whole new generation of zombies too.
The draconian Covid-19 response has raised the curve on bankruptcies, business failures, and unemployment. From Tyler Durden at zerohedge.com:
Gold and silver sold off when Russia announced that it had an effective vaccine for coronavirus. This plays into the myth that a cure for COVID-19 will cure the economy. But, as SchiffGold.com notes, there is plenty of evidence suggesting the damage to the economy is deep and will likely have long-lasting impacts even when the pandemic is in the rearview mirror.
We’ve reported on a number of these signs.
In fact, bankruptcies are already on track for a 1o-year high.
You will find more infographics at Statista
According to S&P Global Market Intelligence, 424 companies had filed for bankruptcy as of Aug. 9.
This exceeds the number of bankruptcy filing for any comparable period since 2010.
S&P Global Market Intelligence’s bankruptcy analysis includes public companies or private companies with public debt. Public companies included in the list of companies with public debt must have at least $2 million in either assets or liabilities at the time of the bankruptcy filing. In comparison, private companies must include at least $10 million.
Recent filings include Men’s Wearhouse owner Tailored Brands Inc.; Prysm Inc., a company that develops large display screens; oil driller Fieldwood Energy Inc.; and Summit Gas Resources Inc., which acquires, explores and develops domestic onshore natural gas reserves.
Long after Covid-19 is but a memory the economic consequences will continue to play out. From Mish Shedlock at thestreet.com:
The new rules make it easier for small businesses to file for chapter 11. And they are.
Small Businesses Walking Away
In 2008, homeowners walked away from mortgages.
Thanks to the Small Business Reorganization Act of 2019 (SBRA), in effect as of February 19, 2020, small businesses have an easier shot at doing the same.
For example, the Twisted Root Burger grew quickly, but co-founder now says ‘I’m gonna walk away’ from some locations.
Twisted Root Burger was a Texas success story, expanding from one casual restaurant in 2006 to 24 sites including restaurants, bars, a brewery and a theater. Now, the company is moving fast in another direction—into bankruptcy.
“I’m not gonna open that restaurant at half the revenue,” said co-founder Jason Boso. “I’m gonna walk away from those restaurants. I’m not gonna set myself up for failure.”
More than 500 companies filed for bankruptcy under the small-business bankruptcy rules since February, according to the American Bankruptcy Institute. June was the top month for filings with 131 cases; many were filed in states hit hard by the pandemic like Florida, Texas, California, New York and Illinois.
“It was somewhat prescient,” said Ryan Wagner, a restructuring and bankruptcy attorney with international law firm Greenberg Traurig LLP. “It was passed without the foresight of the pandemic.” The law is the most significant change to the bankruptcy code since 2005.
- Applies to businesses with $2.7 million in liabilities, raised to $7.5 million under coronavirus stimulus
- Owners continue operating their business while in court
- Owners can retain equity after exiting bankruptcy
- Owners can modify residential mortgages if home was collateral for a business loan
- Faster turnaround to save time and minimize legal fees
- Owners generally have three to five years to repay creditors
- Creditors can be paid based on a business’s projected income
Walking away gets a new lease on life, this time for small businesses.
The carnage in the oil and gas patch has been gruesome. From Wolf Richter at wolfstreet.com:
The bankruptcy epicenter is in Texas.
The Great American Oil Bust started in mid-2014, when the price of crude-oil benchmark WTI began its long decline from over $100 a barrel to, briefly, minus -$37 a barrel in April 2020. Bankruptcies of US companies in the oil and gas sector started piling up in 2015. In 2016, the total amount of debt listed in these filings hit $82 billion. Bankruptcy filings continued, with smaller dollar amounts of debt involved. In 2019, the shakeout got rougher.
And this year promises to be a banner year, as larger oil-and-gas companies with billions of dollars in debt collapsed, after having wobbled through the prior years of the oil bust.
The 44 bankruptcy filings in the first half of 2020 among US exploration and production companies (E&P), oilfield services companies (OFS), and “midstream” companies (gather, transport, process, and store oil and natural gas) involved $55 billion in debts, according to data compiled by law firm Haynes and Boone. This first-half total beat all prior full-year totals of the Great American Oil Bust except the full-year total of 2016:
Nobody is going to pay the top dollars necessary to support many universities to sit at home and watch Zoom lectures. From Maria Copeland at campusreform.org:
- An NYU professor of marketing says the coronavirus will result in many schools closing in coming years.
- Students aren’t getting their money’s worth, and the pandemic has exposed that, he says.
As colleges attempt to recover from the pandemic and prepare for future semesters, a New York University professor estimates that the next 5-10 years will see one to two thousand schools going out of business.
Scott Galloway, professor of marketing at the New York University Leonard N. Stern School of Business told Hari Sreenivasan on PBS’ “Amanpour and Co.” that many colleges are likely to suffer to the point of eventual extinction as a result of the coronavirus.
“there is no luxury brand like higher education”
He sets up a selection of tier-two universities as those most likely not to walk away from the shutdown unscathed. During the pandemic, wealthy companies have not struggled to survive. Similarly, he says, “there is no luxury brand like higher education,” and the top names will emerge from coronavirus without difficulty.
Imagine, you shut down your economy and put 1/3 of the labor force on the beach and you get a depression. Who would have thunk it? From Michael Snyder at theeconomiccollapseblog.com:
The last recession was really, really bad, but it was never like this. It is time for us to face reality, and that means admitting that the U.S. economy has plunged into a depression. This is already the worst economic downturn that America has experienced since the Great Depression of the 1930s, and we are right in the middle of the largest spike in unemployment in all of U.S. history by a very wide margin. Of course it was fear of COVID-19 that burst our economic bubble, and fear of this virus is going to be with us for a very long time to come. So we need to brace ourselves for an extended economic crisis, and at this point even Time Magazine is openly referring to this new downturn as an “economic depression”. Needless to say, there will be a tremendous amount of debate about how deep it will eventually become, but everyone should be able to agree that our nation hasn’t seen anything like this since before World War II.
In order to prove my point, let me share the following 10 numbers with you…
#1 According to a study that was just released by the National Bureau of Economic Research, more than 100,000 U.S. businesses have already permanently shut down during this pandemic, and that represents millions of jobs that are never coming back.
#2 The Federal Reserve Bank of Atlanta is now projecting that U.S. GDP will shrink by 42.8 percent during the second quarter…
A new GDP forecast from the Federal Reserve Bank of Atlanta for the three months through June estimates an unprecedented drop of 42.8 percent. The bank describes the data as a “nowcast” or real-time, compared with the official government report of GDP, which is dated. The first-quarter preliminary data, which showed a 4.8 percent dip, included a limited period of impact from COVID-19.
All of Casey’s suggestions make far too much sense to be implemented by our current rulers. From Casey at internationalman.com:
It’s hard to have a conversation today, or even overhear one, without being exposed to moronic – and I now use that word in its colloquial as well as its clinical sense – opinions about what “we” should do.
“We,” of course, is the government. Everyone believes it should “Do Something.” And it is.
But why deal in half-measures?
Why only send everybody a check for $1,200? Why not buy everyone a new Cadillac to get Detroit back to work, a big new house to help builders, and a $10,000 check that must be deposited at a failing bank and then spent at Victoria’s Secret.
A plan like that certainly sounds like more fun than what I’m going to propose. Especially since Americans are going to be a bit short on fun over the next little while.
They used it all up over the last generation.
I’ve explained elsewhere why we’re embarked on the Greater Depression. That’s a done deal. But here is what needs to happen if the depression is to be as brief and as therapeutic as possible.
1. Allow collapse of bankrupt entities. They’re uneconomic (as their bankruptcy has proven), their managements are overpaid and are proven incompetents. The bailout money going into them is simply wasted. Most of the real wealth now owned by the bankrupt will still exist. It will simply change ownership.
After system overload comes chaos, the betting favorite at SLL for a long time. From Alastair Crooke at strategic-culture.org:
Some have queried how it could be that President Putin would co-operate with President Trump to have OPEC+ push oil prices higher – when those higher prices precisely would only help sustain U.S. oil production. In effect, President Putin was being asked to underwrite a subsidy to the U.S. economy – at the expense of Russia’s own oil and gas sales – since U.S. shale production simply is not economic at these prices. In other words, Russia seemed to be shooting itself in the foot.
Well, the calculus for Moscow on whether to cut production (to help Trump) was never simple. There were geo-political and domestic economic considerations – as well as the industry ones – to weigh. But, perhaps one issue trumped all others?
Since 2007, President Putin has been pointing to one overarching threat to global trade: And that problem was simply, the U.S. dollar.
And now, that dollar is in crisis. We are referring, here, not so much to America’s domestic financial crisis (although the monetisation of U.S. debt is connected to threat to the global system), but rather, how the international trading system is poised to blow apart, with grave consequences for everyone.
Posted in banking, Business, Collapse, Currencies, Debt, Economy, Geopolitics, Governments, Medicine
Tagged Bankruptcy, Reserve Currency, Systemic risk, US dollar, Vladimir Putin
Jim Quinn looks at disturbing scenarios of what’s to come in the future, and then even more disturbing scenarios. From Quinn at theburningplatform.com:
In Part One of this article I detailed the criminal enterprise that constitutes the leadership of this country. The facts are clear. We’ve been screwed over by those who were supposed to represent us. Now it is time to look in the mirror and decide whether we will continue to bow down before our keepers or step up and be accounted for in this coming fight.
Corporate executives who recklessly loaded their companies with debt, while utilizing the proceeds to buy back their own stock, in order to boost their stock price and outrageous compensation packages, left their companies vulnerable to an entirely predictable downturn. After frittering trillions away on their overvalued stock, they now demand bailouts from the taxpayer, and their spineless captured congress lapdogs have obeyed their corporate masters. The 96 – 0 vote in the Senate is truly a disgusting example of the corporate fascist One Party system that reigns in the swamp. Corporate socialism is alive and well.
As this incomprehensible national shutdown extends into April, tens of thousands of small businesses will be forced to close their doors for good. Local restaurants, hair salons, delis, hardware stores, and thousands of other small businesses will be involuntarily shuttered for good.
Posted in Business, Civil Liberties, Collapse, Currencies, Debt, Economy, Government, Insurrection, Politics, Privacy, Surveillance
Tagged Bankruptcy, Fourth Turning, Lockdown, Unemployment