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Bank Failure Impact on Clean Tech Finance 

March 20, 2023

The climate tech sector is worried about funding options following Silicon Valley Bank’s (SVB) collapse. According to Axios, SVB was “a pillar of the start up ecosystem…[with] roughly 1,500 venture-backed startup clients working in climate tech.”  

Why it matters: Climate tech has becoming increasingly important as businesses seek to participate in efforts to mitigate climate risk and meet international carbon reduction commitments. Over $350 billion in tax incentives from the 2022 Inflation Reduction Act further spurred investment in clean tech. A significant constriction in financing availability could put the brakes on climate innovation.

Who finances clean tech: Small start ups have turned to regional and community banks to finance their ventures. As Tom Steyer, former presidential candidate and co-founder of a climate investment firm, explained to Bloomberg:

“Most banks, they’re banking against assets or cash flow. When you think about a startup, which has a good chance of having neither, you understand why many banks shy away. They chose to understand and work with startups.”

Yes, but: Given that recent banking troubles were not the result of any underlying credit issues, many market participants believe that losing SVB as a key climate tech funding partner will result in only a temporary pause. With ample tax incentives and other financial institutions likely to recognize key opportunities, healthy start ups might continue to find the financing they need. According to another venture capitalist:

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Forum Spotlight: Servicers

March 20, 2023

Together, Stacy Ackermann, Leslie Hayton, Rich Carlson, Carl McLaughlin, Andrea Helms, Tony Yousif and Niral Shah form the “Leadership Working Group” for the Servicers and Special Situations Forum.  The group sets agendas and priorities for the Forum, as well as represents the constituency on CREFC’s Policy Committee.

What’s new:  In January, the forum debuted its new expansion as we combined the servicing administration and special situations forums. The Special Situations component newly incorporates the special servicing/special situations and distressed asset management as part of the forum.  The decision to evolve and formally combine servicing administration and special situations was due to feedback from members regarding current market conditions and related pressing issues that the members want to explore and address. 

The newly recast forum will have two sets of leadership – one representing servicing administration and the other representing special situations. Importantly, both sets of leadership will continue to work together to address all aspects of member interests and concerns.

Key Servicer Focus Areas

• Monitoring and tracking servicing activity 
• Transfers of interest and assumptions
• Distressed asset resolutions for securitized and portfolio assets
• Floating rate - transitioning away from LIBOR
• Collateral Valuation

What they’re saying:  Discussions at the January conference focused on the following points:

• Payoff efficiencies and success during 2022
• Increased defeasance volume – will it continue in 2023?
• Moderate uptick in transfers of interest and assumptions
• Increased requests for rate cap modifications and differences across portfolio vs securitized
• Continued valuation uncertainty  - impact on default resolution/enforcement and servicer advances
• Bespoke distressed asset resolution requests and approaches

Looking ahead, servicers are highly focused on current market conditions and the impact on maturing loans and default resolution and enforcement.  The forum leadership expects our forum discussions at the June conference to focus on the current state of the market and what servicers are seeing as “boots on the ground” with respect to the point of contact with borrowers.

 Key Policy Issues:

• SEC’s Conflicts of Interest in Securitization Proposal. The proposal would limit CMBS and CRE CLO sponsors from certain transactions in the first year after issuance. CREFC is asking for express exclusion for servicers from being treated as a “sponsor” under the regulation.
• LIBOR transition:  US Dollar LIBOR is scheduled to cease being published on a representative basis beyond June 30, 2023. Servicer Forum members and CREFC have published the CREFC LIBOR Legacy Playbook, which is designed to address operational issues related to transitioning floating-rate loans currently indexed to LIBOR to the recommended SOFR index plus the ARRC recommended spread adjustment or another contractually agreed-upon benchmark.

What’s Next:  Forum Leaders are seeking nominations for the next Chair Elect to join their leadership slate and look forward to presenting CREFC members with an update on their forum at the Annual June Conference in New York City.  Please send any nominations to Kathleen Olin.

To join the Servicing Administration and/or Special Situations Forums, please register here.  For any forum related questions, please contact Kathleen Olin.

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Meet CREFC's Servicers and Special Situations Forum Leaders - Stacy, Leslie, Rick, and Carl

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NY Leg Counters Gov's Budget; No Mezz Tax or Rent Control

March 20, 2023

On March 15, the New York State Assembly and State Senate released their counterproposals to Gov. Kathy Hochul’s budget.

• The bills do not include a mortgage recording tax on mezzanine debt or preferred equity investments. CREFC opposed a similar tax in 2021.
• State rent control via a good cause eviction law was not included.

Why it matters: The Governor’s Budget Process is the main legislative vehicle for enacting laws in NY. While the Governor did not propose the mezz tax or good cause eviction, the legislature could have added them to its own proposals.

Hochul still could have vetoed the provisions, but inclusion in the counterproposal would have put the policies much closer to enactment if they were used as a bargaining chip or funding source.

By the numbers: While the legislature did not add in the mezz tax or rent control that could negatively impact CRE and multifamily finance, the Assembly did eliminate several affordability focused proposals that Hochul had proposed.

• Update Tax Abatement Incentives for Affordable Multiple Dwellings in New York City: The Assembly did not include the Executive proposal to establish a partial real property tax abatement for capital improvements made to certain rental and owner-occupied buildings located in the City of New York or any city in which the multiple dwelling law applies at local option
• Establish a Local Option Tax Incentive for Affordable Multi-Family Housing: The Assembly did not include the Executive proposal to establish a real property tax exemption for the construction of certain multi-family housing projects on previously vacant or underutilized land. The exemption would be at local option, and would apply to municipalities located outside the City of New York.
• Authorize Tax Incentive Benefits for Converting Commercial Property to Affordable Housing: The Assembly did not include the Executive proposal to establish the Affordable Housing from Commercial Conversions Tax Incentive Benefits (AHCC) program, which would provide a partial real property tax exemption for the conversion of commercial, manufacturing and other non-residential buildings to residential rental buildings located in the City of New York.
• Extend the Project Completion Deadline for Vested Projects in Real Property Tax Law 421-a: The Assembly did not include the Executive proposal to extend the completion deadline for projects vested in the expired 421-a program for four years, from June 15, 2026 to June 15, 2030.

What’s next: The Governor and the legislature will continue to negotiate on the provisions to pass a final budget by April 1 (though that timing may slip). CREFC will continue to monitor developments.

Contact David McCarthy (dmccarthy@crefc.org) with questions. 

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Weekly Talking Points 

March 20, 2023

• The impact to CRE finance from bank failures is likely reduced liquidity from the banking community, particularly from small to mid-sized institutions. Elevated CRE mortgage rates and wider CMBS spreads have reduced loan originations for balance-sheet and CMBS lenders. Read full article here. 
• The political fallout from recent bank failures is hitting Capitol Hill, and lawmakers are scheduling hearings, proposing legislation, and assigning blame. The White House also proposed tougher penalties on executives when their bank fails. Read full article here. 
• Regulators activated emergency powers to cover uninsured deposits and provide a liquidity backstop for Treasuries and Agency MBS that have seen drops in value. The latest crisis will likely play a role as the Fed reviews and proposes bank capital rules. Read full article here. 
• New York’s legislature released its counterproposal to Gov. Hochul’s budget. The bill did not include a tax on mezzanine debt/pref equity and does not implement statewide rent control. However, several of Hochul’s housing affordability initiatives were excluded. Read full article here. 
• CMBS delinquency rates rose 18 bps to 3.12%, the highest post-pandemic rate since December 2021. The recent banking crisis played havoc on CMBS markets as spreads widened and transactions were pulled. Read full article here. 

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2024 Election Outlook: Republican Field Takes Shape

March 20, 2023

The 2016 presidential primary field was crowded and competitive, with 17 candidates seeking the Republican nomination. While the 2024 field may not be as large (yet), it is shaping to be just as competitive.

Three candidates have officially declared for the Republican nomination for President in 2024:

1. Former President Donald Trump – Declared his candidacy just weeks after the midterm election on November 22, 2022. According to RealClear Politics, Trump is leading the field with 43.9%. Despite being impeached twice and under investigation, Trump maintains his popularity with the GOP base.
2. Former U.N. Ambassador Nikki Haley – Officially joined the race on February 14, 2023. Haley was the first high-profile Trump administration official to jump in as a challenger. Haley maintains an edge in the race with her compelling personal background and record as Governor of South Carolina. However, she is considered a long-shot candidate.
3. Vivek Ramaswamy (R) – A political newcomer to the field, announced his campaign on February 21. His background as a former tech and finance executive could appeal to Republican primary voters as a Trump alternative. His profile has recently been elevated in conservative circles because of his anti-ESG rhetoric. However, his lack of name recognition and base support may hurt his chance of succeeding as a major candidate.

Three doesn’t seem like a crowd….yet. However, five other well-known Republicans are mulling a potential run:

1. Gov. Ron DeSantis - Is considered Trump’s greatest rival this cycle. The Governor of Florida, who recently won reelection by 20 points, has kicked off a nationwide book tour to promote his book, The Courage to Be Free. The book tour is considered a soft launch for his 2024 campaign. Last week, he met with Republican legislators in Iowa, prompting Iowa’s Gov. Kim Reynolds (R) to release a statement announcing her neutrality in the GOP presidential primary.
2. Former VP Mike Pence - Trump’s number two in 2016. Pence’s popularity with evangelicals in the GOP base is his greatest strength and weakness because his support in the GOP base ends there. Pence is swinging through the sunbelt states, speaking at universities before officially announcing.
3. Sen. Tim Scott - South Carolina’s junior Senator, has been giving speeches in early primary states. Scott is considered the “nice-guy” candidate, and his diverse background and views could bring a different perspective to the GOP. Additionally, he has been reaching out to donors beyond South Carolina to increase his war chest in recent months.
4. Gov. Glenn Youngkin - Virginia Governor who defied expectations by being elected in a blue state in 2021; made his prime-time debut on CNN last week, headlining a town hall on education. This event signaled his profile is on the rise. Youngkin, in recent weeks, has been seen fundraising in New York for a potential White House bid.
5. Fmr. Secretary of State Mike Pompeo - Is the latest Trump cabinet official publicly mulling a bid. With appearances at CPAC and Fox News Sunday, he has been outspoken about his view that the Republican party needs to move forward and would decide whether to run in the coming months.

The bottom line: In political time, it’s a lifetime until the 2024 Republican National Convention. Over the next 17 months, CREFC will continue to highlight the GOP Presidential primary candidates as the field takes shape.

Contact Chelsea Neil at cneil@crefc.org with any questions about the 2024 cycle. 

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CMBS Performance and Maturity Update 

March 20, 2023

• The CMBS delinquency rate increased 18 bps in February to 3.12%. This was the highest upward movement since December 2021 (up 16 bps) and follows a January reading of 2.94%, the second-lowest since the start of the pandemic. The lowest post-pandemic delinquency rate was 2.92%, reached in September 2022.
• The uptick in the February delinquency rate was largely driven by office and multifamily loans, which were up 55 bps and 27 bps, respectively. Retail was up 17 bps while industrial and hotel were flat.
• We anticipate the delinquency rate may grow more volatile, given the challenging macro environment. This reflects a landscape where borrowers will see higher refinancing rates and the real potential for lower property-level cash flows and asset valuations.
• December’s delinquency rate is still 719 bps lower from its peak of 10.31% in June 2020 during the height of lockdowns during the pandemic.

• The SS rate was up 7 bps in February to 5.18%, the fifth increase since reaching a post-pandemic low of 4.80% in July 2022. As with the delinquency rate, the uptick in the SS rate in February was driven by office and multifamily, which were up 42 bps and 43 bps, respectively.
• While the SS rate remains well below its high of 10.48% (September 2020), the height of the pandemic, higher benchmark and cap rates and the risk of an economic slowdown suggest asset valuations may deteriorate, increasing the potential for more loans to be transferred to SS in 2023 than seen to date.

• As of 3/17/23, CMBS maturities over the next 10 years total approximately $620 billion, with over $147 billion (24%) maturing in 2023 and $115 billion (19%) in 2024.
•  By overall maturities through 2024, office leads the pack with $55 billion (21%) followed by hotel with $54 billion (21%). Multifamily maturities over this time total only $30 billion (11%).

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Capitol Hill Round-Up: Following the Bank Failures

March 20, 2023

Silicon Valley Bank’s (SVB) and Signature Bank’s failure has roiled lawmakers and reignited conversations on how banks should be regulated.

Why it matters: Policymakers don’t fully agree on what led to the run on bank deposits or if regulation, supervision, or bank management was to blame. But if Congress finds common ground on a culprit, legislation could come swiftly. Regardless, we expect federal regulators to take action.

Key Themes: Oversight hearings are being scheduled and a few themes will likely morph into legislation. Treasury Secretary Yellen faced the Senate Finance Committee last Thursday, where senators peppered her with questions about the bank failures.

• Lax Regulation: Sen. Elizabeth Warren (D-MA) has been trumpeting the lack of regulation as a key factor for the large regional bank demise and distress. She and other progressives point to the bipartisan 2018 law S. 2155 that, among other things, exempted smaller banks from certain capital and liquidity requirements. Supporters of S. 2155 have pushed back on these claims.
• Lax Supervision: Some Republicans have blamed federal regulators, particularly the San Francisco Fed for SVB, for not flagging problems and taking action within their supervisory powers. House Financial Services Chairman Patrick McHenry (R-NC) and Senate Banking Ranking Member Tim Scott (R-SC) have demanded a review of two years worth of regulatory activities regarding both banks.
• Bank Management: Bipartisan criticism is focused on SVB’s business mix and asset/liability mismatch: high concentration of uninsured short-term tech deposits and long-term hold-to-maturity bonds. Signature has come under criticism for its crypto holdings, though most of the political ire has focused on SVB.
• Deposit Insurance: There may be a bipartisan consensus on increasing deposit insurance. But some lawmakers characterize the after-the-fact coverage of SVB deposits as a bailout for the tech and venture capital industries, who they say received sweetheart deals for banking with SVB.
• Social Media Frenzy: Technology now allows bank news and deposit activity to move rapidly. While the root causes of the downturn in investor and depositor confidence in these institutions is still being debated, the chatter on social media fed the deposit exits and eventual collapse. Customers’ ability to move large amounts of money at the sign of trouble is a new reality for banks.
• Woke: A handful of commentators have blamed the collapses on ESG priorities. Sen. Ted Cruz announced an oversight investigation and framed the action as “Biden’s Big Tech Bailout”.

What’s next: Legislative proposals and hearings are in the works.

• Bank Exec Penalties: On Friday, President Biden proposed legislation that would target executives of failed banks by making it easier to claw back compensation, hold them legally liable, and banning them from future bank jobs. While there could be some bipartisan appetite to increase punishment on executives, it is unclear if the bill will gain bipartisan traction.
• Deposit Insurance for All? Republicans have floated raising deposit insurance amount as a stabilizing factor. Public statements range from $500,000 on an individual basis, separate levels for business accounts, and even unlimited insurance. Rep. Blaine Luetkemeyer (R-MO) said temporary, unlimited insurance is necessary to prevent a flight of deposits from community banks. But the House Freedom Caucus has condemned universal deposit insurance. While the details will be important, more robust deposit insurance could be a likely legislative outcome.
• S. 2155 Repeal: Sen. Warren and others have proposed a bill to undo the reforms in S. 2155 (passed in May 2018). Passage is unlikely given original legislation was broadly bipartisan (67-31 in the Senate) and the scope was more limited. Additionally, commentators have argued the regulations rolled back under S. 2155 would not have prevented SVB or Signature Bank failures.
• Hearings Galore: Congressional committees are lining up to begin their investigations. The House Financial Services Committee announced it will hold a hearing on March 29 featuring FDIC Chair Martin Gruenberg and Fed Vice Chair for Supervision Michael Barr. Senate Banking will hold a hearing on the week of March 27th, likely with regulators and bank executives. Other committees may conduct oversight hearings, including Senate Commerce.

The bottom line: Congress is moving quickly to investigate and address the bank failures, but the real policy changes will likely come from regulators (more on that below). Contact David McCarthy (dmccarthy@crefc.org) with questions. 

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Recent Bank Failures and What It Means for Commercial Real Estate

March 20, 2023

The failures of Silicon Valley Bank and Signature Bank, as well as the precarious positions of First Republic and Credit Suisse, meaningfully impacted U.S. lending and capital markets activity in a variety of ways last week:

• Drove market volatility higher (VIX above 26)
• Reversed expectations of the magnitude of future Fed rate hikes
• Triggered heightened recession fears
• Raised concerns over the effectiveness of bank regulation today (House Financial Services Committee hearings on bank failures on tap late this month)
• Turned a spotlight on limited liquidity in CRE finance markets
• Pushed CMBS spreads wider and cause transactions to be pulled (see Capital Markets Update below)

Crisis Sparked in Part by Rising Benchmark Rates; All Eyes on the Fed This Week

The FOMC meets this Tuesday and Wednesday; a 25-basis-point increase may be in the cards, but don’t rule out a Fed pivot/pause. The Fed raised rates eight times this cycle, with the range now at 4.50% - 4.75%, pushing borrowing costs to the highest since 2007. Note the ECB hiked interest rates 50 bps to 3% last week.

“Good Banking Is Produced Not by Good Laws, but by Good Bankers” - Hartley Withers, Editor, The Economist, 1916 to 1921

What’s Happened? On March 12, key bank regulators (FDIC, Federal Reserve, Treasury) stepped in to protect the U.S. financial system when Silicon Valley Bank and Signature Bank failed. Regulators exercised emergency powers to cover uninsured deposits and stem losses on Treasuries and Agency MBS. SVB and Signature Bank ‘saves’ will play an essential role as the Fed reviews and potentially proposes new, more stringent bank capital rules.

Key Steps Taken to Date:

• Closing SVB and Signature Bank and backing all deposits, including those beyond the $250,000 insured under Federal law. The move was intended to avoid a more broad-based ‘systemic’ meltdown. The Federal Deposit Insurance Corporation (FDIC) announced it is extending the bidding process for buyers interested in purchasing Silicon Valley Bank, citing “substantial interest.”
• As for Signature Bank, New York Community Bancorp assumed substantially all of the deposits and some of the assets and lines of business of Signature Bank from the FDIC, although it did not purchase Signature's CRE portfolio. They also did not buy the credit card business or Signature’s crypto unit Signet, which facilitates the buying and selling of digital currencies. As compensation for the deal, NYCB is granting the FDIC the right to buy shares in NYCB that could be worth as much as $300 million. The FDIC estimates the deal will cost the bank regulator’s deposit fund $2.5 billion.
• Launching the Bank Term Funding Program (BTFB). Provides loans up to one year to banks, savings associations, credit unions, and other eligible depository institutions, pledging U.S. Treasuries, agency debt, and MBS, and eliminates the need to sell securities into a stressed market. The loan is fixed to the one-year overnight index swap rate plus 10 bps on the day the advance is made.
• Sale of Credit Suisse to UBS. UBS Group agreed to acquire Credit Suisse on Sunday for $3.25 billion, further de-escalating the crisis. Bloomberg reports that CS was valued at $8 billion on March 17, 2023. According to reports, the Swiss government is providing some $9 billion to backstop potential UBS losses that may be incurred in the transaction.

Look Out Below. Regulators, legislators, and market participants will be discussing this crisis for some time and watching closely for continued stress on liquidity across sectors.

SVB Under Fed Scrutiny. Recent news reports highlight that SVB had been scrutinized by Federal bank regulators for over a year and warned about addressing what were viewed as risky practices. According to a New York Times report:

“In 2021, a Fed review of the growing bank found serious weaknesses in how it was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as ‘matters requiring attention’ and ‘matters requiring immediate attention,’ flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.” 

The report highlighted that, by July 2022, the bank had failed to address the Fed’s concerns and was ultimately rated deficient for governance and controls.

Expect a multitude of hearings/studies on:

·        Safety and soundness of our banks (focus on small/mid-sized institutions)

·        What it means for capital flows into U.S. businesses and households

·        What new legislation/regulation needed to prevent further bank crises

Reduced Liquidity to CRE?

The immediate impact for CRE is likely reduced liquidity from the banking community, particularly from small to mid-sized institutions. Elevated interest rates and wider credit spreads have reduced loan originations for balance sheet and CMBS lenders. Given the heightened focus on bank lending, CMBS financing may increase should competition from balance sheet lenders slow.

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Treasury Secretary Yellen testified last week to Congress that the nation's banking system remains sound and Americans "can feel confident" about their deposits.

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CREFC Capital Markets Update Week of 3/20

March 20, 2023

Banking Sector Troubles Spread to CMBS       

• Private-Label CMBS and CRE CLOs. Widening trouble in the regional banking sector rippled into the CMBS market, pushing spreads wider and causing issuers to pull planned deals. Year-to-date private-label CMBS and CRE CLO issuance stood at $6.2 billion, well behind last year’s tally at this time of $43.8 billion.
• According to Commercial Mortgage Alert, several transactions were teed up, including a $1 billion conduit offering backed entirely by five-year loans, but then delayed when markets failed to calm down. The freeze may continue this week as the market awaits clarity on the future path of interest rates when the FOMC meets on March 21 – 22.
• Treasury yields fell on the week as banking worries spurred haven buying and sidelined the idea that the Fed could continue its aggressive rate increases. As of Friday, Fed Funds futures showed a 38% chance that the central bank would hold rates steady at its next meeting – compared to 0% the week prior – with 62% expecting a 25 basis point hike. The 10-year Treasury yield ended the week down 27 bps at 3.43%. CME 1M Term SOFR was down 10 bps on the week to 4.76%.
• Benchmark CMBS spreads were sharply wider across the curve and all subsectors, driven by risk-off sentiment in the broader markets. LCF AAA conduit bond spreads ended the week wider by 28 bps to 160, with AA – A spreads up 40 – 45 bps to 275 – 425 and BBB- spreads up 75 bps to 950. SASB AAA spreads were up 40 – 50 bps on the week to 185 – 275, while CRE CLO AAA spreads were up 45 to 235.
•  Agency CMBS. Agency issuance totaled $1.8 billion, consisting of $1.3 billion of Fannie DUS and $520 million of Freddie Multi-PCs. Freddie postponed a fixed-rate K-Deal due to market conditions. Agency issuance for 2023 now stands at $20.0 billion, 52% lower than the $41.9 billion for the same period last year.

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