One Big Thing
While balance sheet lenders like banks and insurance companies have wide latitude to extend forbearance to borrowers during the pandemic, CMBS and debt funds that use backleverage do not, thanks to a heavy reliance on OPM. (h/t John Meek)
IMO, this is a big part of the reason why distress is more likely to come more from aggressive debt funds and CMBS lenders than it is from banks and life insurance companies. While banks and life insurance companies may very well see some level, they typically have the ability to provide borrowers with the time and resources to cure the default because they hold loans on their books. CMBS and debt funds that are leveraged cannot offer these accommodations because the lenders and servicers aren’t the ones making the ultimate call.
I suppose that the irony in this is that the backleverage used by debt funds is often provided by none other than the banks themselves who will ultimately decide what happens to a debt fund that violates its covenants and can’t make margin calls.
What I’m Reading
Chain Gang: Big restaurant chains are licking their chops and eyeing prime real estate as they watch small restaurants in great locations struggle.
Boom: Mortgage refinancings are set to hit a 17-year high in 2020 with rates at record low levels. Expect this to surge even more as things stabilize and spreads fall back towards their historical level. See Also: Weekly mortgage applications, down just 1.5% from a year ago, are pointing to a remarkable recovery in home buying (h/t Jeff Lemieux).
Long Road Back: The CBO estimates U.S. unemployment will exceed 15% through September, remain above 11% the rest of the year and hold above 9.3% for all of 2021, just a percentage point below the Great Recession high
Sketchy AF: Biotech company Moderna announced positive data for a potential COVID vaccine on Monday. It’s stock surged 30% and ignited a massive stock market rally. The company promptly announced a $1.2 billion secondary stock offering to raise capital after the spike. Now vaccine experts are calling into question the data behind the announcement and saying that its too short on detail to tell if the vaccine shows promise or not.
Risk On: Herbalife is targeting a $600mm junk bond sale where the proceeds will be used to buy back stock. Pyramid scheme companies are using junk debt to buy back stock again. Nature is healing. Humans are the virus.
Chart of the Day
Lower bond yields have not helped REITs
Raising Spirits: A nurse was suspended from her job in in the all-male coronavirus wing of a hospital after wearing nothing but underwear under her transparent gown because Russia.
Let it All Hang Out: A homeowner was awakened by his dogs barking to find a naked man in his kitchen because Florida. I’ve said this before: if you can’t trust a man with a full neck tattoo, then who can you trust?
Snake Oil: Tom Brady is selling a $45 vitamin that he claims will make you immune to COVID. NEVER go full Florida Man.
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