Category: Finance & Investment

Libor Plunge Risks Wreaking Havoc in $670 Billion CLO Market

If three-month LIBOR sinks below 1 percent, it would be a major headache for the market.

(Bloomberg)—Tumbling interest rates are throwing a wrench into the collateralized loan obligation market that could eventually lead to dust-ups between different stakeholders, market watchers say.

At the heart of the issue is the plunging London interbank offered rate. Buyers of CLOs, which are tied to the gauge, are increasingly factoring the prospect of negative fixings into their due diligence as the Federal Reserve slashes its benchmark to near zero and three-month Libor sinks below 1%. While the likelihood of it going negative remains small, it would be a major headache for the $670 billion market that buys more than half of all leveraged loans.

That’s because roughly one in five CLO tranches lacks any sort of Libor floor — thresholds that guarantee minimum payouts to debt investors should the reference rate plummet. If Libor were to eventually fall below the spread on these structures, the negative all-in coupon could mean CLO debt holders would in fact owe money back to the issuer. That may benefit buyers of the equity portions of the capital stack, but industry veterans say CLOs are simply not legally or operationally equipped to handle a reversal in cashflow.

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Retail Investors Fuel a Surge in Non-Traded REIT Fundraising

Most recent fundraising has gravitated to non-traded NAV REITs, which provide additional transparency and liquidity than traditional non-traded REITs.

After weathering a rocky patch that sent many investors to the sidelines, non-traded REITs appear to be back on track with steady gains in capital flowing into the sector.

Non-traded REITs raised $11.8 billion in 2019, which is the highest fundraising total since 2014, according to industry data from Robert A. Stanger & Co. Inc. The firm is predicting another strong year of fundraising ahead with a further 27 percent jump to $15 billion for 2020.

Certainly, there are any number of unforeseen events that could derail that prediction, such as an increase in interest rates that would dampen investor appetite. But, for now, the industry appears to be on solid footing with a number of factors contributing to strong fundraising. Part of the credit is due to continued evolution within the sector that is resonating with its core base of retail investors.

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Libor Transition Hits Hurdle as SOFR-Linked Bond Sales Slump

Market watchers say the change of tack is unlikely an indictment of SOFR itself.

(Bloomberg) — The biggest issuers of bonds tied to the benchmark tapped to replace U.S. dollar Libor are suddenly pulling back. That’s a potential blow to efforts by regulators to wean America’s financial system off a much-maligned reference rate.

The Federal Home Loan Banks, which have priced about $170 billion of debt tied to the Secured Overnight Financing Rate since its inception in 2018, have virtually turned off the spigot in recent months. They’ve sold roughly $13 billion of SOFR-linked notes since the start of November, down from more than $70 billion over the preceding three months, according to data compiled by Bloomberg.

Market watchers say the change of tack is unlikely an indictment of SOFR itself. Rather it may simply be the lenders capitalizing on shifts in investor demand. But they also note the vital role these banks — which support housing, economic development and infrastructure projects — have played as standard-bearers in the nascent SOFR market. And there is a risk to wider adoption among issuers should they keep retrenching.

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Fed’s Leveraged-Lending Stress Test Is a Start to Easing Fears

Fund managers are increasingly concerned about excessive debt on company balance sheets.

(Bloomberg Opinion) — Ask just about anyone on Wall Street what worries them the most, and corporate leverage will most likely rank among their top fears. In August, Bank of America Corp. surveyed 224 fund managers with a combined $553 billion in assets and found that a record 50% of them were concerned about excessive debt on company balance sheets.

It’s not hard to see why that’s the case. For one, a growing number of well-known U.S. companies are now rated triple-B, potentially just one economic downturn from becoming junk and facing a spike in borrowing costs. But at least that’s more or less out in the open. More ominous is the explosive growth in the market for leveraged loans and collateralized loan obligations. Global regulators haven’t found a way to quantify the threat they may pose to the financial system in a worst-case scenario. At least not yet.

The Federal Reserve is apparently ready to take a stab at measuring that risk itself. It announced last week that as part of its annual stress tests, Wall Street’s biggest banks must prove they can withstand a “wave of corporate sector defaults” and outflows from leveraged-loan funds that cause steep enough price declines to flow through into CLO tranches. The scenario anticipates that such a sell-off would also spill over into other types of risky credit and private equity.

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Will Private Equity RE Players Continue Raising Funds at a Breakneck Pace?

There are a record high number of funds in the market at the start of 2020.

There’s never been more private equity cash chasing real estate assets. And yet more funds than ever continue to come to the market. That could make 2020 the frothiest year yet for private equity investors in the CRE space.

In 2019, fund managers raised $151 billion, a volume that edged past the previous record of $148 billion achieved in 2018, according to Preqin. Average fund sizes are larger than ever as well with 295 funds accounting for that capital vs. 486 funds that had raised the $148 billion figure in the prior year.

That activity speaks to the still strong demand to invest in real estate with many investors that are maintaining, if not increasing allocations. These days, institutions are pushing 15 percent to 20 percent allocations to alternative investments, the largest beneficiaries of which are real estate and private equity, notes Byron Carlock, national partner, real estate practice leader at PwC.

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Retreat of Negative Rates Isn’t an All-Clear for Investors: Mohamed A. El-Erian

A large-scale retreat by central banks from ultra-low rates and accommodating balance sheet policies does not appear imminent.

(Bloomberg Opinion) — Negative-yielding government bonds have been a significant force for a superb year of investment returns for both stocks and bonds, and many are welcoming their recent decline as an indicator of what will support the next leg up in valuations. Yet the evidence remains mixed, suggesting a more nuanced approach to longer-term investing.

The growth and persistence of negative-yielding debt in 2019 has done more than deliver attractive price appreciation on government bonds. It has pushed investors to take on more risk, pushing up the price of assets from investment-grade and high-yield corporate bonds to emerging markets to, of course, equities. It has also encouraged companies to intensify their financial engineering, often involving debt issuance to pay for stock buybacks. And it has supported a range of mergers and acquisitions.

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Tax-Haven Wedding Venues Become Nightmare for Retiree Investors

Investors in an event-rental space in Carmel, Ind. Filed a lawsuit in federal court claiming they were duped in a fraud.

(Bloomberg)—A small group of retirees paid a combined $6.2 million last year for ownership stakes in a fancy event-rental space in Carmel, Indiana, expecting it would generate double-digit returns and qualify them for a tax break used by thousands of Americans to defer capital gains on real estate.

Instead, they now own a vacant lot generating no income, and the money appears to be gone. In a federal lawsuit filed in April, most of the investors claim they were duped in a vast fraud involving financial advisers, a property broker and what seemed to be a fast-expanding company called Noah Corp. that hosts weddings, bar mitzvahs and corporate events at venues in 25 states from Utah to Florida to New Hampshire.

Noah filed for bankruptcy last month, not long after the suit was filed, compounding a cash crunch at venues where it was the only tenant. But investors in the Indiana site claim in court documents that the collapse was the result of a “robbing Peter to pay Paul’’ business model in which Noah, broker Rockwell Debt-Free Properties Inc. and others sought to generate a steady flow of new investors.

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Can Depreciation Explain the Magnitude of Trump’s Reported Losses?

Tax experts say that while it’s technically possible, it’s probably not the full story.

Last week the New York Times made waves reporting, after combing through a decade’s worth of tax transcripts that it obtained, that Donald Trump reported $1.17 billion in losses in the years 1985 to 1994.

“In fact, year after year, Mr. Trump appears to have lost more money than nearly any other individual American taxpayer,” The Times found when it compared his results with detailed information the I.R.S. compiles on an annual sampling of high-income earners. His core business losses in 1990 and 1991 — more than $250 million each year — were more than double those of the nearest taxpayers in the I.R.S. information for those years, according to the newspaper.

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How the Stock Market’s Wild Ride Could Affect CRE Investment

Stock market volatility may spur investors to allocate more funds to direct ownership of real estate.

The stock market’s recent rollercoaster, with October’s sharp correction followed by a post-midterm election surge, can put the investment community on edge, including commercial real estate investors.

“People who invest in real estate don’t invest in a vacuum,” says Mark Dotzour, a real estate economist who spent 18 years as chief economist of the Real Estate Center at Texas A&M University before opening a private consultancy three years ago.

“They are looking across the whole horizon of investment opportunities, so that includes stocks and bonds, private equity, public REITs, all of that. My belief is that stock and bond market behavior—volatility if you want to call it that—has a significant impact on real estate investment decisions.”

It’s impossible to completely separate one’s emotional reactions from financial behavior, says Mike Ervolini, CEO of Cabot Investment Technology, which sells behavioral finance software to professional equity fund managers. Ervolini previously served as a portfolio manager and CIO with AEW Capital Management.

Real estate investors pay close attention to what’s happening in the stock and bond markets and while they may be able to overlook recent volatility, they’ll need to keep an eye on longer-term trends to determine if commercial real estate investment is still the best bet for their financial portfolios, according to Dotzour. For now, it seems the answer is yes.

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Foreign Buyers Continue to Boost U.S. Investment Sales Volume

Despite a pullback in buying from Chinese investors, 2018 is on pace to deliver what could be a record high year of foreign investment sales in the current cycle.

According to New York City-based research firm Real Capital Analytics (RCA), cross-border investment sales topped $62.7 billion year-to-date through third quarter—a 56 percent spike compared to the same period in 2017 and even edging past robust sales of $60.3 billion during the first three quarters of 2015, which set a high watermark for foreign investment activity to date. This has been a big year for mega-deals involving foreign buyers, including Toronto-based Brookfield Property Partners’ $15 billion takeover of mall REIT GGP and the Unibail-Rodamco acquisition of Westfield that accounted for $7.7 billion of U.S. transaction volume. However, even without those large entity-level deals, there continues to be a steady pipeline of buying fueled by international capital.

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