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
- Eligible lenders are US depository institutions while eligible borrowers can have up to 10K employees and $2.5 billion in 2019 revenue. Eligible borrowers must be US domiciled companies with the majority of their employees based in the US.
- Eligible Loans must have the following characteristics: a 4-year maturity with 1-year deferment of P&I; Adjustable rate of SOFR + 250-400 basis points; minimum loan size of $1 million; and no Prepayment Penalty
- Maximum loan amounts are the lesser of either $25 million or 4X 2019 EBITDA in the New Loan Facility, and the lesser of either $150 million, 30% of the borrower’s existing and committed but undrawn bank debt, or 6x 2019 EBITDA for the Expanded Loan Facility
- An SPV funded by the Fed will then purchase a 95% participation in these loans at par value with the originator retaining 5%. SPV gets the 1% origination fee, while the originator receives 25 basis points for servicing the sold portion.
- Borrower agrees to limits on compensation, stock repurchases, and capital distributions
- Meanwhile, the originating lender cannot use the monies to refinance their existing loans or cancel or reduce any existing lines of credit.
- Expires on September 30, 2020.
- 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
The BAN Report: PPP Update / Rent Delinquencies Skyrocket / Unemployment Claims Rise / Opening Up / Talking Comeback / Introducing CSC Specialty Asset Management-4/9/20
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.
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.”
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.
- Highly trained professionals with comprehensive loan workout experience
• Broad knowledgeof 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
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 email@example.com