April ’20

The BAN Report: PPP Maxed Out / Main Street Lending Program / Who’s Paying? / RIP Fracking? / Born to Run / Introducing CSC Specialty Asset Management-4/16/20

PPP Maxed Out
The Payment Protection Loan Program will run out of money at some point today as over $324 billion of the allocated $349 billion as of last night.   Yesterday, Treasury Secretary Mnuchin and SBA Administrator Carranza issued the following statement:
“The SBA has processed more than 14 years’ worth of loans in less than 14 days.  The Paycheck Protection Program is saving millions of jobs and helping America’s small businesses make it through this challenging time.  The EIDL program is also providing much-needed relief to people and businesses.   By law, the SBA will not be able to issue new loan approvals once the programs experience a lapse in appropriations.”
In a period of a few weeks, a single new loan program became the obsession of every bank and banker we have spoken to.   There were problems with the program, particularly its broadness as a good portion of the money went to businesses that didn’t need it, but it was an overwhelming success.    The program didn’t exist until March 27 and the SBA had to open the program to a whole new universe of lenders without 7(a) lending experience.
Treasury Secretary Mnuchin and Senate Minority Leader Schumer are in negotiations to approve another $250 billion to the program.
The talks between Mnuchin and Schumer will continue into Thursday when the Senate is scheduled to meet in the afternoon for a pro forma session.
Senators could at that time pass an agreement to provide an extra $250 billion for the popular Paycheck Protection Program (PPP) and $250 billion for hospitals and state and local governments, which Democrats are demanding — but it would require all 100 of them to agree.
Meanwhile, the Federal Reserve announced that its Liquidity Facility, in which depository institutions can borrow at 35 basis points to fund these loans, is now fully operational.    All the relevant forms and documents are posted and available.   Non-banks have not yet been given access, but they are in the process of opening this up to them, although it is unclear which parties will be approved.
Essentially, this program was a race between banks to provide as much of these dollars to their customers.   Some banks were slow to figure it out, while others became experts.   One bank told me that nearly every single employee was working on these loans and their senior management team spent all weekend inputting the applications into E-Tran to make sure their clients got the money, providing a disproportionate share of money than their larger competitors.    These loans are expected to be funded within ten days.
Main Street Lending Program
The Federal Reserve rolled out a new $1.2 trillion program to provide loans to midsize businesses.   The intent appears to fill the gap between the PPP program and the larger corporate rescue packages.   Its technically two programs (Main Street New Loan Facility and Main Street Expanded Loan Facility), each for $600 billion.    One facility is for new loans, while the other is for loan increases to existing loans.    Here is what we know so far, which is entirely from the term sheets of both programs.
The Main Street Lending Program is perhaps the most unprecedented step the Federal Reserve has taken so far.    To our knowledge, the Federal Reserve does not generally take true credit risk.   They take liquidity and pricing risk, but they generally purchase, guarantee, or lend against relatively safe assets.   This represents a radical departure as the program appears to be geared towards struggling companies.
To wit, the Eligible Borrower must “attest that it requires financing due to the exigent circumstances presented by the coronavirus disease 2019 (“COVID-19”) pandemic.”   And the programs require these loans to be new money.    Companies struggling with COVID-19 that need new money are likely using the money for defensive purposes (i.e. working capital).    Not too many of these companies are buying new equipment, buildings, or making acquisitions.
So, both the loan purpose and the terms represent investments essentially by the Fed in workout credits.   These appear to be projection loans based on the idea that the Borrower’s business environment will return to a pre-COVID-19 environment.   Bankers are scratching their heads trying to understand the Fed’s intent.
The American Bankers Association and the New York Bankers Association both said they too are trying to get their arms around the Fed’s announcements.
Joseph Lynyak III, a partner at the law firm Dorsey & Whitney, said in a statement that the Fed has begun to “look down the road” with the announcement of these programs to jump-start these businesses.
“The intention is twofold: First, the facilities will provide necessary liquidity to banks to extend the credit,” Lynyak said. “More importantly, however, the facilities will effectively function as working capital loans for businesses as the nation emerges from the COVID-19 emergency.”
There are also some other considerations that need to be addressed.    Banks that make these loans are tying their hands on using their rights to terminate their existing lines of credit, so these loans should be made to bank’s most important customers.    And, borrowers will want to know whether the Fed will take any adverse actions if they end up laying off employees, as they are required to make a good faith effort to retain them.
Without a doubt, the Federal Reserve and Treasury are trying everything they can do to inject life into the economy.   Time will tell if they have done too much, but few could argue they have done too little.
Who’s Paying?
Last week, we wrote about elevated apartment rent delinquencies, but apartment renters appear to be doing a better job paying their rents than commercial tenants.
The National Multifamily Housing Council (NMHC) found that 84 percent of apartment households made a full or partial rent payment by April 12 in its second survey of 11.5 million units of professionally managed apartment units across the country, up 15 percentage points from April 5.
NMHC’s Rent Payment Tracker numbers also examined historical numbers and found that 90 percent of renters made full or partial payments from April 1-12, 2019, and 91 percent of renters in March 1-12, 2020. The latest tracker numbers reflect a payment rate of 93 percent compared to the same time last month. These data encompass a wide variety of market-rate rental properties, which can vary by size, type and average rental price. 
Meanwhile, commercial tenants have been anecdotally slower to make their rent payments, and some are taking advantage of the situation.
Only 20 percent of the Related Group’s commercial tenants paid their rent in April, executive Jon Paul Pérez said during The Real Deal’s webinar on Friday.
“If you get 20 percent you’re sort of happy and jumping up and down,” he said. About 90 percent of Related’s multifamily tenants paid rent, which Pérez said is much higher than the 50 percent the company originally expected.
Mr. Perez’s comments were as of April 10, so the collection rate should improve, but commercial tenants are invoking force majeure to get out of their rent payments.   On the loan side, banks are seeing stress from both their consumer and commercial buyers.   On the commercial side, banks should have concerns about their commercial credit lines.
A total of $231.2 billion was drawn from revolving credit lines across the industry since March 5, the research team at Goldman Sachs said in a note to clients issued earlier this week. The rush caused a spike in first-quarter loan growth at banks.
While its early, consumer loans appear to be doing a little better.   Bank of America CEO Brian Moynihan shared some insight on the 1st quarter conference call.
A big reason for initial stability was the decision to quickly approve deferments for mortgages, credit cards and auto loans, Moynihan said. Federal stimulus programs could help curb delinquencies in the second quarter.
BofA has received hardship requests tied to about 3% of its credit card accounts and 5% of its mortgages. In comparison, 16% of its small business accounts submitted requests for leniency.
While its early, a few themes are emerging.    Consumers are doing a better job of paying their bills, including rent and loan payments, while commercial tenants and likely their landlords are struggling to keep their obligations current, although some may be strategically defaulting.   Unfortunately, no one appears to be worried about moral hazard.
RIP Fracking?
Bethany McLean, who wrote a book about fracking and helped uncover the Enron scandal, argues that fracking and energy independence were an illusion created by cheap debt.
In reality, the dream was always an illusion, and its collapse was already underway. That’s because oil fracking has never been financially viable. America’s energy independence was built on an industry that is the very definition of dependent — dependent on investors to keeping pouring billions upon billions in capital into money-losing companies to fund their drilling. Investors were willing to do this only as long as oil prices, which are not under America’s control, were high — and when they believed that one day, profits would materialize.
The promised profits haven’t materialized. In the first half of 2019, when oil was around $55 a barrel, only a few top-tier companies were profitable. “By now, it should be abundantly clear that the current shale oil business model does not work — even for the very best companies in the industry,” the investment firm SailingStone Capital Partners explained in a recent note.
All that’s left to tally is the environmental and financial damage. In the five years ending in April, there were 215 bankruptcies for oil and gas companies, involving $130 billion in debt, according to the law firm Haynes and Boone. Moody’s, the rating agency, said that in the third quarter of 2019, 91 percent of defaulted U.S. corporate debt was due to oil and gas companies. And North American oil and gas drillers have almost $100 billion of debt that is set to mature in the next four years.
This is a provocative and thought-provoking piece.   However, the desire for US energy independence is high and Bloomberg reports that the Energy Department may pay US oil producers to leave oil in the ground, in order to reduce the supply of oil and raise energy prices.
Born to Run
With empty interstates and police officers focusing on other priorities, many road drivers are taking advantage of the opportunity to drive as fast as they possibly can.
A white 2019 Audi A8 L sedan with extra fuel tanks in the trunk pulled away from a Midtown Manhattan parking garage late last Saturday night. A driver on a high-speed mission aimed the car west and hit the accelerator.
Averaging more than 100 miles per hour over nearly 3,000 miles of the nation’s epically uncrowded highway system, the car arrived at an oceanside hotel in Redondo Beach, Calif., less than 27 hours later.
The car and its three-person crew, none of whom have yet revealed themselves publicly, easily broke the record for driving from New York to Los Angeles, a sprint known as the Cannonball Run. Past record-holders expect the mark to fall again in the coming weeks, and maybe again and again — one more impact of the coronavirus-induced quarantine that the nation is under.
With traffic levels down more than 90% in some cases, insurance companies are rebating car owners and municipalities are seeing far less revenue from speeding violations and parking tickets.
Introducing CSC Specialty Asset Management
As you may already know, our firm specializes in loan sales for banks and private equity firms. During the 2008 financial crisis, we launched a specialty business, to help with workouts during unique times. Unfortunately, this pandemic has brought on a lot of uncertainty, and we have decided to provide this service again.
Many financial institutions need resources to manage the surge of loan workout unleashed by the COVID-19 pandemic. Clark Street Capital’s Specialty Asset Management (“SAM”) provides a contract workout solution for lenders to prudently manage elevated problem assets. Our team of experienced professionals act as a seamless and integrated outsourced workout solution.
  • Highly trained professionals with comprehensive loan workout experience
  • Broad knowledge of multiple loan types, ranging from traditional CRE, hospitality, senior housing, churches, SBA, and C&I
  • Our professionals join your team under your platform and your supervision
Our Team:
James McCartney, Managing Director CSC SAM
A subsidiary of Clark Street Capital, CSC Specialty Asset Management is led by James McCartney, who brings decades of management of complex portfolios.
Analytical and results-driven, Jim has a demonstrated track record of achievement in loan workouts real estate debt, commercial and industrial (C&I) financing for both banks and finance companies.
Before joining Clark Street, Jim served in a variety of senior roles with Urban Partnership Bank in Chicago, a community development financial institution capitalized by a variety of Wall Street an regional institutions to acquire the assets of ShoreBank, subject to an FDIC loss share agreement on a highly distressed and complex $1.4 billion portfolio.
Jon Winick, CEO Clark Street Capital
Jon Winick is the CEO of Clark Street Capital. In 2008, at the height of the financial crisis, Jon saw the opportunity to establish a leading bank advisory and loan sale firm, sensing a void in the marke of firms with real-world banking, loan and real estate experience.
If we can be of any help to your institution, please email jon.winick@clarkstcapital.com

The BAN Report: PPP Update / Rent Delinquencies Skyrocket / Unemployment Claims Rise / Opening Up / Talking Comeback / Introducing CSC Specialty Asset Management-4/9/20

PPP Update

After a chaotic and perhaps premature roll-out, the SBA’s new Payment Protection Program is now fully operational.     While we know many lenders are frustrated with some of the kinks, a little patience is in order.   The SBA, which normally guarantees less than $30 billion a year in loans, has been tasked with rolling out a brand-new $350 billion facility in just a few days while expanding the eligibility to make these loans well beyond the current universe of SBA-eligible lenders.    Nevertheless, a lot has happened in the past week to give clarity to participants in the program.    Special thanx to Chris Hurn of Fountainhead for keeping us up to date with the program as it has evolved.

The Federal Reserve announced a Payment Protection Program Lending Facility this week, providing an initial term sheet.    This is to address the fact that these loans are made at interest rates (1%) that are not economical to lenders.    Attached is the term sheet.   Essentially, depository institutions can receive funding for these loans at an interest rate of 35 basis points with no fees.   Additionally, the Fed is working on expanding this funding to non-depository eligible lenders.

In order to further motivate banks to make these loans, the Agencies announced an interim final rule that assigns 0% risk weighting to these loans.   This was motivated by the Fed removing Wells Fargo’s growth restriction, solely so they could make these loans.

Last Friday, the rules came out for the Paycheck Protection Program.     This is so far the most important document released by the SBA regarding this program.     We encourage everyone to read this document, as it is the rules regarding the program.     Additionally, yesterday they came out with a list of Frequently Asked Questions.

Earlier this week, the SBA 7(a) loan processing system called E-Tran crashed, and a new gateway was opened up yesterday with assistance from Amazon.

Finally, Senate Republicans proposed another $250 billion for the program, but there is opposition from Democrats that need to be addressed.

Rent Delinquencies Skyrocket

As we have stated, April will be one of the most notably months in obligation history, as millions of renters, borrowers, and other obligors struggle to make their obligations.     Already, we are seeing evidence that many apartment renters are late on their April rent.   As of yesterday, nearly 1/3 of all renters had not yet made their rent payment.

Only 69% of tenants paid any of their rent between April 1 and 5, compared with 81% in the first week of March and 82% in April 2019, the data show.

The count includes renters who only made partial payments. Many renters who haven’t yet paid may still pay later this month, NMHC said, and an uptick in paperless payments over the weekend may not be reflected in this initial count.

The data come from 13.4 million rental apartments analyzed by several real-estate data firms, including RealPage, Yardi and Entrata. The properties included are considered investment grade with a tenant base that may skew higher-income than the median renter. The data don’t include single-family homes, and the apartments counted exclude public housing and other subsidized affordable housing.

Some tenants will be temporarily protected from eviction for unpaid rent by a patchwork of federal and local laws. But real-estate operators and analysts have worried that unpaid rent could set off a chain of events that first cause commercial mortgage defaults, zapping investments in bonds backed by those mortgages.

The last sentence is critical.   If tenants don’t pay rent, then landlords will struggle to pay their mortgages, which will cause defaults on loans as well as securitized bonds backed by these loans.    In our conversations with multi-family lenders, they are largely accommodating borrowers that need short-term payment relief, thus preventing an adverse chain reaction.    The problem is more serious with non-recourse loans, in which the Borrower can walk away ultimately without any responsibility for the deficiency.

Moreover, most courts are closed, so one couldn’t start legal proceedings against a borrower or a tenant anyway.    The government-backed multi-family lenders have suspended both foreclosures and evictions for the next 60 days as well.    If the lenders provide forbearance to their borrowers, then they can better work with their tenants.

Unemployment Claims Rise

Another 6.6 million Americans filed for unemployment last week, bringing the total percentage of the workforce that has lost their jobs to 10% in just three weeks.

Jobless rolls continued to swell due to the coronavirus shutdown, with 6.6 million Americans filing first-time unemployment claims last week, the Labor Department reported Thursday.

That brings the total claims over the past three weeks to more than 16 million. If you compare those claims to the 151 million people on payrolls in the last monthly employment report, that means the U.S. has lost 10% of the workforce in three weeks.

Most of that employment decline came in restaurants and drinking establishments, although health care and social assistance also took a hit. A more representative number of the actual impact to employment came through the Labor Department’s survey of households, which indicated a drop of nearly 3 million from the employment ranks.

While these numbers are frightening, many of these layoffs are temporary, as so much of the economy is shut down.   For example, Dick’s Sporting Goods announced this week that it will furlough almost 40K employees while intending to bring them back when their stores fully re-open.    We believe this is all unfortunate, but healthy and necessary as these businesses cannot afford to pay employees when there is no work for them to do.     Moreover, many laid-off workers are receiving 100% of their prior earnings due to the CARES Act.   Many businesses are deciding whether they keep workers and get 8 weeks of reimbursement from the PPP program, or are they better off laying them off and re-hiring them later?   Again, there are not good jobs for businesses that go under because they retain under-utilized payroll for too long.

Many labor analysts are rightfully concerned that workers skills will diminish if they leave the employment rolls.   We think this situation is so unique and won’t apply for most workers.   What employer is going to look at a gap in someone’s resume from April – June 2020 and wonder why they were idle?    Our primary concern must be getting the COVID-19 under control, so that we can start to re-open the economy.    Once the economy starts to re-open, the employment picture will improve.

Opening Up

Everybody wants to re-open the economy, but how and when?   Is it a gradual slow re-open?   Economists are beginning to consider the trade-offs of how to re-open the economy.

Essentially, economists say, there won’t be a fully functioning economy again until people are confident that they can go about their business without a high risk of catching the virus.

“Our ability to reopen the economy ultimately depends on our ability to better understand the spread and risk of the virus,” said Betsey Stevenson, a University of Michigan economist who worked on the White House Council of Economic Advisers under President Barack Obama. “It’s also quite likely that we will need to figure out how to reopen the economy with the virus remaining a threat.”

Public health experts are beginning to make predictions about when coronavirus infection rates will peak. Economists are calculating when the cost of continuing to shutter restaurants, shopping malls and other businesses — a move that has already pushed some 10 million Americans into unemployment, with millions more on the way — will outweigh the savings from further efforts to slow the virus once the infection curve has flattened out.

Without more testing, “there’s no way that you could set a time limit on when you could open up the economy,” said Simon Mongey, a University of Chicago economist who is among the authors of a new study that found that rapid deployment of randomized testing for the virus could reduce its health and economic damage.

The key will be testing and masks usage.   For example, if you simply take the temperature of every single person who enters a store, and require mask usage, you could re-open most retail.    Austria, which started its lockdown on March 16, looks like it will be the first western country to re-open its economy, which it is doing gradually.

Hardware and gardening stores, stores of fewer than 4,306 square feet (400 square meters) and Vienna’s parks will reopen April 14. Customers are required to wear face masks and stay far apart from each other. Shopkeepers must limit the number of people inside.

On May 2, all other stores, including malls and hair salons, are set to reopen. Restaurants and hotels will have to wait until mid-May. The same holds for schools. Homeschooling will continue for another month, but graduation exams are expected to take place on schedule.

It isn’t clear what will happen with movie theaters, public swimming pools, churches and sports facilities. Large gatherings are prohibited until the end of June. The government expects Austrians will be able to travel domestically this summer, but there are to be no summer vacations abroad. At one point voices in government suggested that travel to and from Austria would only be allowed once the country has been vaccinated. That could take 12 to 18 months.

The challenge for the US is how do you re-open certain regions with widespread inter-state travel?   Perhaps, Hawaii and Alaska can try this approach, but its going to present challenges.   A gradual reduction of the federal guidelines will likely be the approach.

We do believe that, in these uncertain times, predicted the future is extremely difficult.   Time will tell which states and countries got this right.   The states that had the most restrictive measures may find that their economy was damaged more, or the opposite could be true.    As Casey Stengel once said, “Never make predictions, especially about the future.”

Talking Comeback

As people are quarantining, the art of the phone call is on the rise.

Phone calls have made a comeback in the pandemic. While the nation’s biggest telecommunications providers prepared for a huge shift toward more internet use from home, what they didn’t expect was an even greater surge in plain old voice calls, a medium that had been going out of fashion for years.

Verizon said it was now handling an average of 800 million wireless calls a day during the week, more than double the number made on Mother’s Day, historically one of the busiest call days of the year. Verizon added that the length of voice calls was up 33 percent from an average day before the outbreak. AT&T said that the number of cellular calls had risen 35 percent and that Wi-Fi-based calls had nearly doubled from averages in normal times.

New needs are emerging in the crisis. “We’ve become a nation that calls like never before,” said Jessica Rosenworcel, a commissioner at the Federal Communications Commission, the agency that oversees phone, television and internet providers. “We are craving human voice.”

Amen, so good to see people talking more on the phone.

Introducing CSC Specialty Asset Management

As you may already know, our firm specializes in loan sales for banks and private equity firms. During the 2008 financial crisis, we launched a specialty business, to help with workouts during unique times. Unfortunately, this pandemic has brought on a lot of uncertainty, and we have decided to provide this service again.

Many financial institutions need resources to manage the surge of loan workout unleashed by the COVID-19 pandemic. Clark Street Capital’s Specialty Asset Management (“SAM”) provides a contract workout solution for lenders to prudently manage elevated problem assets. Our team of experienced professionals act as a seamless and integrated outsourced workout solution.

Our Team:

James McCartney, Managing Director CSC SAM

A subsidiary of Clark Street Capital, CSC Specialty Asset Management is led by James McCartney, who brings decades of management of complex portfolios.

Analytical and results-driven, Jim has a demonstrated track record of achievement in loan workouts real estate debt, commercial and industrial (C&I) financing for both banks and finance companies.

Before joining Clark Street, Jim served in a variety of senior roles with Urban Partnership Bank in Chicago, a community development financial institution capitalized by a variety of Wall Street an regional institutions to acquire the assets of ShoreBank, subject to an FDIC loss share agreement on a highly distressed and complex $1.4 billion portfolio.

Jon Winick, CEO Clark Street Capital

Jon Winick is the CEO of Clark Street Capital. In 2008, at the height of the financial crisis, Jon saw the opportunity to establish a leading bank advisory and loan sale firm, sensing a void in the marke of firms with real-world banking, loan and real estate experience.

If we can be of any help to your institution, please email jon.winick@clarkstcapital.com

BAN Report Sign-up