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Gensler Seeks Larger Budget, Brushes Off Comment Period Criticism

May 23, 2022

At a Congressional appropriations hearing last week SEC Chair Gary Gensler pressed for an 8% budget increase to roughly $2.15 billion, stating: “We should have grown during these past five years. Instead, the opposite happened.” Gensler went on to note that the agency’s headcount of full-time employees has remained flat despite the growth of private funds and registered public entities during that period, according to Politico.

Comment Period Criticism
Republicans insisted at the hearing that the SEC is moving a partisan agenda with complex rulemakings with insufficient time for public comment. While extended comment periods are appreciated, they view the agency as doing too much too quickly, and not focusing on their core responsibilities to protect investors, maintain markets, and facilitate capital formation. 

Rep. Mark Amodei (R-NV) questioned during the hearing whether the rulemaking staff is sufficient to deal with public comments. “If you’ve got about the same [level of] staffing, and the comment periods are less, give me an idea of how you think that dynamic is good for the end product of rulemaking.” Gensler responded that 140 people in the economic unit and 20-30 people in the general counsel office work on these rules and that SEC comment periods of at least 60 days is adequate for public comment.

Crypto Plans
The budget increase would allow the SEC to maintain its current services while adding roughly 250 full-time staff to support areas like digital asset oversight given its plans to require cryptocurrency trading platforms to register with the SEC. Gensler maintained that the platforms are trading securities rather than commodities under the SEC’s definition and should register; “They’re investment contracts. They’re securities. We’re trying to work with the crypto trading platforms to get them registered.”

 The Wall Street Journal reported that the SEC plans to add 20 investigators and litigators to its unit dedicated to cryptocurrency and cybersecurity enforcement, nearly doubling the unit’s size. Gensler said he worries that more investors will be harmed in cryptocurrency markets, after the collapse this month of the TerraUSD stablecoin. “I think a lot of these tokens will fail,” Mr. Gensler told reporters after a House Appropriations Committee panel hearing Wednesday. “I fear that in crypto…there’s going to be a lot of people hurt, and that will undermine some of the confidence in markets and trust in markets writ large.” 

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CREFC Capital Markets Update

May 23, 2022

Hedging Cost Increase Surprises Borrowers
Last week, an article in Bloomberg highlighted the dramatic increase in hedging costs for floating-rate commercial mortgages in recent months. Lenders almost always require that borrowers obtain interest-rate caps on floating-rate loans to protect against debt service payments soaring out of control in a rising rate environment. With the Fed raising rates twice this year with more increases planned, floating-rate indices have surged.

According to Chatham Financial, a risk management advisory firm, the cost for a two-year, 2% interest-rate cap on a $25 million mortgage was $52,000 in January 2022. That same interest rate cap in early May was $535,000, and prices for a similar three-year, 2% cap increased by 4,000%. “Last year, it would be like buying flood insurance for your house in the mountains,” said Chris Moore, a Managing Director at Chatham. “This year, it's sort of like buying flood insurance for your house on the beach as a hurricane is making landfall.”

Borrowers who need to refinance or extend maturities on existing debt may be in for the biggest surprise. “If a mortgage was taken out two years ago, when rates were very low, the cost of the rate cap was nothing,” said Lea Overby, Head of US CMBS Research at Barclays. “Now, it can change a borrower's decision at an inopportune time.”

Interest-rate cap costs will remain high for borrowers in the near term. The Fed is planning on additional half-point increases in June and July, and potentially even September, bringing the federal funds rate to 2.7% by the end of the year, up from less than 1% today. This is reflected in the SOFR forward curve, as shown below.

While the rising rate environment may push some borrowers to lock in fixed-rate financing, others may continue to opt for the flexibility of floating-rate loans. “If you think a recession is coming, then rates will eventually fall,’’ said Lisa Pendergast, Executive Director of the CRE Finance Council. “You may need to contend with higher rates for a period but then may take advantage of lower rates should the economy falter.’’

ARRC Endorses 12-Month SOFR Term Rate
On May 19, the Alternative Reference Rates Committee (ARRC) announced its endorsement of CME Group’s forward-looking 12-month SOFR term rate. The ARRC previously recommended CME Group’s 1-month, 3-month, and 6-month SOFR term rates. However, at the time of that endorsement in July 2021, the CME Group did not produce a 12-month SOFR term rate.

Further supporting the ARRC’s announcement was the continued development of SOFR futures markets. The ARRC notes that 12-month rates are relatively less used and therefore believes that the used of the 12-month SOFR term rate should be primarily for legacy products and in trade or receivables finance.

Macro Volatility Continues to Weigh on Issuance

• Private-Label CMBS and CRE CLOs. Only two private-label transactions priced last week:
  • $609 million CRE CLO and a $761 million conduit transaction.
  • As of May 20, CMBS and CRE CLO issuance stood at $63.1 billion, 32% higher than the same period in 2021 ($47.9 billion).
  • According to BofA Global Research, there are 31 private-label transactions totaling ~$21 billion in the current pipeline consisting of eight conduit, 12 SASB, and 11 CRE CLO transactions. However, if the market volatility continues, it is highly likely that pricing will be delayed and timelines will be extended.
  • Choppy macro conditions, including another sharp selloff in equity markets, led to another week of spread widening in conduit CMBS spreads:
    • Spreads on 10-year super-senior AAA conduit CMBS widened by 2 bps to 128, while AA – A tranches widened by 19 – 24 bps to 215 – 275, and BBB- spreads increased by 29 bps to 515.
    • The conduit transaction that priced last week saw the LCF AAA clear at 136 bps, 8 bps wider than the secondary market level (128 bps).
      
      
• Agency CMBS. Last week saw ~$6 billion in new agency transactions, consisting primarily of Freddie K issuance (~$4 billion) and Fannie DUS (~$1 billion). Total agency issuance reached $74.3 billion for the year-to-date period ended May 20. Agency issuance is down 7% from the same point last year ($80.0 billion).
  • Agency spreads held on and were generally consistent, widening only 2 bps for senior Freddie K and 3 bps for Fannie GeMs bonds.

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Aid for Ukraine, But Not Restaurants During Busy Week

May 23, 2022

Congress completed an active week of negotiations on China competitiveness, aid for Ukraine, baby formula, and responding to the Buffalo shooting. Additional pandemic aid for restaurants failed and demonstrated that more funds for COVID tests, therapeutics, and vaccines may not become available.

U.S. Innovation and Competition Act to Strengthen Supply Chains
Congressional leaders hope to complete House and Senate conference committee negotiations by June 21 on the U.S. Innovation and Competition Act (S.1260). The legislation would strengthen supply chains, improve America’s competitiveness with China, and provide $52 billion in funding to revitalize the U.S. semiconductor manufacturing industry. Speaker Nancy Pelosi said she hopes to have the bill done by July 4 to celebrate “our new independence” from foreign-made microchips. 

Ukraine Aid
On Thursday, the Senate approved $40 billion in aid to Ukraine by an overwhelmingly bipartisan vote of 86-11. The Associated Press reports that the funds include:

• $24 billion for arms, equipment, financing weapons purchases, and paying for American troops deployed in nearby countries,
• $9 billion in direct aid to Ukraine’s government, and
• $5 billion for food to countries reliant on Ukraine’s food production.

Funds also help Ukrainian refugees in the U.S., seize Russian oligarchs’ assets, reopen the U.S. embassy in Kyiv, and prosecute Russian war crimes.

Now $54 billion has been pledged to Ukraine assistance, including $13.6 billion approved earlier this year. The amount is more than what the U.S. spends annually on all military and economic foreign assistance. On Wednesday, the U.S. embassy in Kyiv was reopened and the Senate confirmed Bridget Brink to serve as U.S. ambassador to Ukraine, which has not had a Senate-confirmed ambassador in three years. 

Baby Formula
Congress also approved $28 million in emergency funds to FDA to address the nationwide baby formula shortage and passed legislation to remove restrictions on which formulas can be purchased under the WIC program during a public health emergency or product recall. 

Buffalo Shooting Response
Democrats responded to the racism that allegedly motivated the Buffalo shooter as the House passed the Domestic Terrorism Prevention Act by a vote of 222-203, including just one Republican, retiring Rep. Adam Kinzinger (R-IL). The legislation would create offices within DHS, DOJ, and the FBI focused on domestic terrorism and white supremacy. Gun control advocates recognize that Congress is unable to do more to prevent gun violence, but Senator Chris Murphy (D-CT) thinks Democrats should make gun safety a key part of their 2022 midterm message.

Restaurant Aid
A $48 billion bipartisan bill stalled after a 52-43 vote fell short of 60 votes required to provide additional funds for restaurants, small business, gyms, and music venues still impacted by the pandemic. The legislation would have replenished the pandemic-era Restaurant Relief Fund and provide $2 billion to gyms, $500 million to minor league sports teams, $2 billion for live performing arts venues. The lack of further assistance left restaurant lobbyists seething. SBA had announced that more than 278,000 applications were submitted to the program, but the agency was only able to fund approximately 101,000 of them. 

No Path for COVID Aid
Punchbowl News reports that Democrats on both sides of the Capitol are now skeptical that Congress will pass another round of COVID relief to replenish federal stockpiles of tests, therapeutics, and vaccines. Not enough Republicans support either the $10 billion Senate Republicans previously agreed to or the $22.5 billion Speaker Nancy Pelosi has sought to prepare for future needs. 

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