February ’20

The BAN Report: The 40MM Hotel Construction Portfolio / SNC Review / Trump & Deutsche Bank / Credit Suisse CEO Fired for Spying / AOBA Recap-2/13/20

The 40MM Hotel Construction Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $40MM Hotel Construction Portfolio.”  This exclusively-offered portfolio is offered for sale by one institution (“Seller”). Highlights include:
  • A total unpaid principal balance of $39,386,450 at completion, comprised of construction loans for four limited service hotels
  • The weighted average coupon is 8.24% during construction with attractive yields and prepayment penalties on the permanent loans
  • Construction completion commitments and fund control on all loans
  • Low-leverage LTVs between 36% and 65%
  • All loans are personally guaranteed by experienced operators with excess liquidity
  • Loans are secured by properties in California (48%), Florida (28%), and Michigan (24%)
  • Opportunity to acquire depository relationships
  • All loans will trade for a premium to par and any bids below par will not be entertained.
Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, financial statements, and collateral information.    Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.
Event Date
Sale Announcement Thursday, February 13, 2020
Due Diligence Materials Available Online Tuesday, February 18, 2020
Indicative Bid Date Tuesday, March 10, 2020
Closing Date Thursday, March 26, 2020

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

SNC Review

Late last month, the Agencies completed their semi-annual review of the SNC program, in which the Agencies jointly review Shared National Credits, defined as a loan commitment of at least $100MM shared by at least 3 total banks.   In aggregate, the program represents $4.8 trillion of credits.   The latest review saw a material increase in special mention and classified loans, representing a 13.7% increase.   Once again, the big target as leveraged loans.

Credit risk associated with leveraged lending remains elevated. The SNC reviews found that many leveraged loan transactions possess weak structures. Underwriting risks are often layered and include some combination of high leverage, aggressive repayment assumptions, weakened covenants, or permissive borrowing terms that allow borrowers to draw on incremental facilities and further increase debt levels. Many of these credit risk factors are market driven and were not materially present in previous downturns. The agencies are focused on assessing the impact of layered risks in leveraged lending transactions and on determining whether bank risk management practices continue to evolve to address emerging risks.

The volume of leveraged transactions exhibiting these layered risks has increased significantly over the past several years as strong investor demand has enabled borrowers to obtain less restrictive terms. Given the accumulated risks in these transactions, a material downturn in the economy could result in a significant increase in classified exposures and higher losses. In addition, nonbank entities continue to participate in the leveraged lending market as these firms seek credit exposure via loan purchases. These nonbank entities hold a significant portion of non-pass leveraged SNC commitments and mostly non-investment grade2 equivalent SNC leveraged term loans. Banks primarily hold investment grade equivalent revolving SNC leveraged exposures. The agencies note these investment preferences are not universal as some banks seek higher yields in this relatively benign environment.

Agent banks’ risk management practices for leveraged loan commitments have improved since 2013. Agent banks are better equipped to assess borrower repayment capacity and estimate enterprise valuations while having improved other risk management practices. While most agent banks have implemented risk limit frameworks, these frameworks have not been tested by an economic downturn.

Overall, leveraged loans are 49% of total SNC commitments and represent the vast majority of classified commitments (80%).     Nevertheless, the SNC portfolio is performing well.   Total special mention & classified equals $335MM, essentially flat from five years prior.

Trump & Deutsche Bank

Last week, the New York Times Magazine had an exhaustive recap of the relationship between President Trump & Deustsche Bank, which famously began in the late 90s when most New York banks avoided Trump.

The roughly $425 million that Offit helped arrange for Trump back in 1998 was the start of a very long, very complicated relationship between ­Deutsche Bank and the future president. Over the course of two decades, the bank lent him more than $2 billion — so much that by the time he was elected, ­Deutsche Bank was by far his biggest creditor. Against all odds, Trump paid back most of what he owed the bank. But the relationship cemented ­Deutsche Bank’s reputation as a reckless institution willing to do business with clients nobody else would touch. And it has made the company a magnet for prosecutors, regulators and lawmakers hoping to penetrate the president’s opaque financial affairs.

I have spent the past two years interviewing dozens of ­Deutsche Bank executives about the Trump relationship, among other subjects. Quite a few look back at the relationship with a mixture of anger and regret. They blame a small group of bad bankers for blundering into a trap that would further damage ­Deutsche Bank’s name and guarantee years of political and prosecutorial scrutiny. But that isn’t quite right; in fact, the Trump relationship was repeatedly blessed by executives up and down the bank’s organizational ladder. The cumulative effect of those decisions is that a German company — one that most Americans have probably never heard of — played a large role in positioning a strapped businessman to become president of the United States.

In some respects, the association with a polarizing president has been bad for ­Deutsche Bank’s business. Executives told me it has become a bit harder to win assignments from public institutions, like government-­employee pension plans. And ­Deutsche Bank has become an enticing target for ambitious prosecutors and politicians around the world — including Democrats who, after taking control of the House of Representatives last year, swiftly issued subpoenas for the bank’s records on Trump, his family and his companies.

But remarkably, in the final accounting, the Trump relationship may have been an overall positive for both the loyal bank and its prized client. Trump got the money he needed to keep buying and building, which in turn allowed him to maintain the reputation as a respectable businessman that he eventually rode to the White House. ­For its part, Deutsche Bank has pocketed tens of millions of dollars in fees and interest payments. The bank won’t comment on whether Trump is up-to-date with his loan payments, and Vrablic, who remains a bank employee, has declined to publicly discuss her relationship with Trump. But Trump is not known to have defaulted on any of his recent loans or otherwise burdened the bank with large losses; in fact, the overall relationship appears to be profitable.

The relationship became challenging when Trump sued Deutsche Bank in 2008 pre-emptively before defaulting on a $334MM loan for the Chicago Trump building.   What was remarkable is how this unit stopped doing business with Trump, while another unit, private banking, ultimately renewed the relationship, and went on to finance multiple projects, including Trump’s purchase of Doral.

Credit Suisse CEO Fired for Spying

Last Friday, Credit Suisse CEO Tidjane Thiam resigned under board pressure, due to two alleged incidents of spying on former top-level executives.   Thiam appeared to be a capable and accomplished CEO that was undone by his petty handling of two former executives.

Thiam—the first black CEO of a major European bank—resigned after he lost the confidence of the bank’s board of directors in the wake of a scandal in which private investigators, hired by Credit Suisse, spied on two former senior-level executives. It was announced by the bank on Friday that the board accepted Thiam’s resignation. Thomas Gottstein, a top executive in Switzerland, will take over the CEO role. 

Leading up to the ouster, Thiam and Credit Suisse chairman Urs Rohner had reportedly been at odds over the accusations of espionage. The first reported incident was that of Iqbal Khan, the former head of the bank’s lucrative and highly successful wealth management unit. Khan was said to have bristled under Thiam’s management and told others that he was not shown the appreciation that he deserved. There was talk of Khan potentially taking over the CEO position.

It’s been reported that Thiam and Khan were on bad terms. Khan, in addition to being a successful banker, was neighbors with Thiam. The animosity and tensions steadily grew between the two men and was amplified when Thiam complained about annoying renovations taking place at Khan’s home. Thiam spitefully planted trees on his grounds, which blocked Khan’s view of Lake Zurich. The situation escalated when the two met at a party and needed to be separated to avoid a physical altercation.

Mr. Thiam may be the first and only bank executive fired for spying on former employees.     It is a reminder though that board must consider the psychological fitness of their CEO, as this clearly was a case of male ego at its worst.

AOBA Recap

We asked Hovde Group to provide a recap of the Acquire or be Acquired Conference, a widely-attended bank M & A conference put on every year by Bank Director.

The Acquire or be Acquired Conference (“AOBA”) concluded it 26th year, and it was a year dominated by some common themes more so than in prior years. Technology and digital strategies were abundant throughout the three-day conference.  We asked a number of our clients what they learned during this conference versus prior sessions. The answer was almost unanimously driven by the need to adapt to the technology revolution, competition from fintech and how technology and the younger generation is going to transform the delivery of products and services. This theme was evident throughout the conference. In almost each of the large MOE’s that have been announced, in each case the need to quickly upgrade the combined entity’s technology platform was a key strategic rationale for the merger. In fact, many of the panel sessions included some discussion around technology, including institutions that have sifted through the many technology options, integrated them successfully and have seen positive results, to the oligopoly of the big three platforms, and to new cloud-based initiatives. Needless to say, this was the far-reaching common theme this year.

Outside of technology, some common themes similar to many of the prior years were once again demonstrated and presented by the panelists. From the continued interest in credit unions buying banks, to proper M&A planning or considering M&A vs. organic growth strategies, these themes appear to be even more relevant today given where we are in the cycle and the current political landscape. Clearly this Election was talked about throughout the sessions and the implications surrounding the industry should certain Democratic Nominees be elected President, and specifically the roll back of tax cuts and tightened regulation. It was clear to us that most were at a minimum, optimistic about the status-quo remaining intact. Clearly should things change in November, the flood gates could open in 2021 for those looking to exit!

We asked a number of clients during the week if they thought the current environment was expected to improve. The overwhelming answer was this appears to be about as good as it may get for quite some time. We tend to agree! The yield curve in our view is unlikely to drastically improve, even if the Fed continues to lower rates. Competition is not expected to just dissipate, so the good old days of NIM exceeding 4.5% may be a thing of the past unless the long end of the curve steepens considerably. Credit quality can’t get much better!  Our friends on the buy-side in many cases are modeling in flat to even negative EPS growth in 2020. If this holds true, we don’t see valuations for public institutions improving, which will impact M&A multiples.

The trend toward MOEs have accelerated due in large to challenges facing the industry. Recently announced Bank MOE’s, at least on paper, are compelling, with double digit EPS accretion through synergies and cost savings, but cultural integration challenges have kept investors in “show me mode”. Unfortunately, with revenue growth and operating challenges not going away, coupled with range bound trading valuations, there is no double this MOE wave is here to stay.

 

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