September ’18

The BAN Report: Debt Crisis in Fracking? / Gen Z Enters Workforce / Ultra-Rich Report / Rents Climb for Older Apartments / Prime Student Loan Portfolio-9/6/18

Debt Crisis in Fracking?

Financial journalist Bethany McLean, who is releasing a book this month on the fracking industry, is warning about a possible debt crisis in the space.    The industry has a total debt load of approximately $200 billion, while cash flow has been negative.

Some of fracking’s biggest skeptics are on Wall Street. They argue that the industry’s financial foundation is unstable: Frackers haven’t proven that they can make money. “The industry has a very bad history of money going into it and never coming out,” says the hedge fund manager Jim Chanos, who founded one of the world’s largest short-selling hedge funds. The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses. In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.

A key reason for the terrible financial results is that fracked oil wells show a steep decline rate: The amount of oil they produce in the second year is drastically smaller than the amount produced in the first year. According to an economist at the Kansas City Federal Reserve, production in the average well in the Bakken — a key area for fracking shale in North Dakota — declines 69 percent in its first year and more than 85 percent in its first three years. A conventional well might decline by 10 percent a year. For fracking operations to keep growing, they need huge investments each year to offset the decline from the previous years’ wells.

It’s all a bit reminiscent of the dot-com bubble of the late 1990s, when internet companies were valued on the number of eyeballs they attracted, not on the profits they were likely to make. As long as investors were willing to believe that profits were coming, it all worked — until it didn’t.

To their credit, the fracking industry survived an obvious attempt by the Saudis and others to bankrupt it a few years ago, but is the business model sustainable?   At some point, investors and lenders will demand cash flow, or we could have billions in dollars of problem loans to resolve.

Gen Z Enters Workforce

Generation Z, born between the mid-1990s and the mid-2000s, are beginning to enter the workforce, and they are truly children of the great recession.

About 17 million members of Generation Z are now adults and starting to enter the U.S. workforce, and employers haven’t seen a generation like this since the Great Depression. They came of age during recessions, financial crises, war, terror threats, school shootings and under the constant glare of technology and social media. The broad result is a scarred generation, cautious and hardened by economic and social turbulence.

Gen Z totals about 67 million, including those born roughly beginning in 1997 up until a few years ago. Its members are more eager to get rich than the past three generations but are less interested in owning their own businesses, according to surveys. As teenagers many postponed risk-taking rites of passage such as sex, drinking and getting driver’s licenses. Now they are eschewing student debt, having seen prior generations drive it to records, and trying to forge careers that can withstand economic crisis.

Early signs suggest Gen Z workers are more competitive and pragmatic, but also more anxious and reserved, than millennials, the generation of 72 million born from 1981 to 1996, according to executives, managers, generational consultants and multidecade studies of young people. Gen Zers are also the most racially diverse generation in American history: Almost half are a race other than non-Hispanic white.

Gen Z’s attitudes about work reflect a craving for financial security. The share of college freshmen nationwide who prioritize becoming well off rose to around 82% when Gen Z began entering college a few years ago, according to the University of California, Los Angeles. That is the highest level since the school began surveying the subject in 1966. The lowest point was 36% in 1970.

For those older workers who have clashed with millennials, perhaps there is help on the way with the next generation.     Fortunately, these workers are entering the workforce at a period of low unemployment, so perhaps their risk-adverse attitudes will change as they become more established in their careers.

Ultra-Rich Report

Wealth-X released its annual report on World Ultra Wealth, a survey of the world’s ultra high net worth population.    Hong Kong surpassed New York City as the city with the highest number of ultra high net worth individuals, defined as individuals with a net worth more than $30MM.

US STILL THE DOMINANT UHNW COUNTRY WHILE CHINA AND HONG KONG SHOW DYNAMIC GROWTH. The US remained by far the leading country for UHNW individuals in 2017, accounting for a 31% share, but it recorded the weakest growth in its ultra wealthy population and net worth among the top seven countries. Collective wealth in China jumped by 33%, generating large gains in average net worth. The top 10 UHNW countries all experienced double-digit growth in total wealth.

HONG KONG OVERTOOK NEW YORK TO BECOME THE WORLD’S LARGEST UHNW CITY. Wealth creation was boosted by enhanced links with mainland China. New York posted the weakest growth among the top 10 cities. Another global financial hub, Tokyo, maintained its top three city status. Paris jumped over London to become the largest UHNW city in Europe. China’s largest UHNW city of Shanghai was well down the rankings, partly reflecting the wide dispersion of ultra wealth across the country. However, China accounted for 26 of the 30 fastest-growing major UHNW cities over the past five years.

Asset holdings of the ultra wealthy are interesting.    As of 2017, their largest holding was liquid assets (34.9%), followed by private holding (32.2%), public holdings (26.3%) and alternative assets (6.6%).     Surprisingly, 67.5% were described as self-made.

Rents Climb for Older Apartments

According to a study by apartment list, older apartment are seeing faster rental growth than newer buildings.

While the data we analyzed does not allow us to track individual properties, inferences can be drawn by looking at rent growth within building age cohorts. We found that since 2000, rents have grown fastest among the oldest building cohorts, which tend to be the most affordable. From 2000 to 2016, the real median rent for rental units built in the 1990s grew by a relatively modest average of 6.4 percent across the nation’s 50 largest metros, as these once brand new buildings began the aging process. Over the same period, rents for units built prior to 1960 grew at over three times that rate.

The quickened pace of rent growth for older building cohorts has resulted in a more narrow price gaps across buildings of different ages. In 2000, the median rent of properties built prior to 1960 was 23 percent lower than that of properties built in the 1990s. As of 2016, that gap is down to 7 percent. In short, as renter cost burdens continue to pose a major concern, the least expensive cohorts of rental housing are seeing the fastest rent growth.

Despite high levels of multi-family construction in the past decade, the share of rental units that are 10 years old or less have been steadily declining.

The $30MM Prime Student Loan Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $30MM Prime Student Loan Portfolio.” This exclusively-offered portfolio is offered for sale by one institution (“Seller”).   Highlights include:

  • A total unpaid principal balance of $30,465,667, comprised of 388 loans
  • 4 regional pools encompassing 40 states
  • All loans are refinanced student loans originated in the past 13 months
  • Portfolio has a weighted average coupon of 5.03%
  • Fixed-rate loans with a weighted average maturity of 12.5 years (151 months)
  • Strong credit metrics, including a weighted average FICO score of 771
  • Weighted average annual income of $176,314 to support an average loan of $78,520
  • 86% of the loan balances are enrolled in ACH
  • 61% of the borrowers have graduate degrees with an average age of 33
  • Originator has strong historical performance with a default rate of 0.08%
  • All loans will trade for a premium to par and any bids below par will not be entertained

Loan files are scanned and available in a secure deal room for review.    Based on the information presented, a buyer should be able to complete their due diligence remotely.

Event Date
Sale Announcement Thursday, August 23, 2018
Due Diligence Materials Available Online Monday, August 27, 2018
Indicative Bid Date Thursday, September 20, 2018
Closing Date Thursday, October 11, 2018


Please read the executive summary for more information on the portfolio.  You will be able to execute the confidentiality agreement electronically by clicking on the upper left hand corner of the link to the executive summary.

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