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Real Estate-Backed Loans Stage Comeback in CLO Surge

Untitled Document ABI Bankruptcy Brief

October 11, 2018

 
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NEWS AND ANALYSIS

Real Estate-Backed Loans Stage Comeback in CLO Surge

Wall Street is cooking up a new type of mortgage-backed security for bond investors: the commercial real estate collateralized loan obligation (CRE CLO), the Wall Street Journal reported. The financial product is part of a broad surge in CLO issuance as institutional investors clamor for more of the floating-rate securities, which outperform most bonds when interest rates rise. Global CLO issuance is expected to hit a record of at least $165 billion in 2018, a 27 percent increase from the previous year, according to data from Creditflux. Issuance of CRE CLOs is expected to hit about $13 billion this year, more than twice the amount sold in 2017. The CRE-CLO deals hitting the market are fundamentally different from the commercial real estate collateralized debt obligations, or CDOs, bankers sold investors before the 2008 financial crisis, bankers and lawyers working on these new deals say. Many of those older CDOs owned a hodgepodge of the riskiest mortgage securities and were purchased by investors using borrowed money. CDO prices collapsed when real estate markets crashed, then fell further as margin calls forced most owners of the debt to sell out simultaneously.
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Commentary: Mattress Firm Bankruptcy Is a Corporate Nightmare*

Just two years after Steinhoff International Holdings NV paid $3.8 billion to acquire Mattress Firm Inc., its U.S. bedding subsidiary has filed for bankruptcy, according to a Bloomberg commentary. Steinhoff, a South African retailer that is itself struggling for survival after a massive accounting scandal, had already booked more than 1.6 billion euros ($1.9 billion) of impairments in relation to Mattress Firm before last week’s chapter 11 filing. Now, Steinhoff will be forced to surrender half of the U.S. store chain’s equity in return for $525 million of financing provided by Steinhoff bondholders. Another goodwill writedown looks likely, according to the commentary. Mattress Firm’s balance sheet shows its liabilities exceeding its assets by $1 billion. The company had run out of options, having burned through about $500 million of cash in three years. A Mattress Firm holding company was on the hook for $3.2 billion of Steinhoff intra-group loans.

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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.


Analysis: Millennials Increasingly Tapping into Personal Loans

Millennials are adding a different kind of debt to their balance sheets: personal loans, CNBC.com reported. Those were the findings following an analysis of borrower data from 2015 through August 2018 by LendingPoint, a provider of personal loans. The lender studied 49,545 funded loans in all. Personal loans typically have a set term of three to five years and generally charge a fixed interest rate. People tap into them for a range of reasons, including emergencies and wedding finances. While these loans are unsecured, lenders can assess late fees in the case of default and, in extreme cases, try to garnish your wages and send the debt to collectors. Roughly 12 percent of the individuals who took out a personal loan in 2015 with LendingPoint were 35 and younger. Since then, that proportion has roughly doubled: As of 2018, that age cohort now accounts for about a quarter of applicants.

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Commentary: Puerto Rico’s Fragile Recovery Is Being Built on Thousands of People Just Doing Their Jobs*

While life appears to be regaining some sense of normalcy in Puerto Rico, just getting to this point after Hurricane Maria took an astonishing amount of work, according to a Washington Post commentary. Even with the amount of labor utilized to this point, the fragile reality and future facing Puerto Ricans remains precarious, according to the commentary. Some traffic lights on main thoroughfares and electronic toll plazas on major highways remain inoperable. In San Juan’s Ocean Park neighborhood, rows of homes along the waterfront battered relentlessly by Maria’s storm surge sit vacant and abandoned. In nearby Condado, for every commercial building that is open for business, two or three more are shuttered with plywood. Outside San Juan, locals on all four corners of the island anxiously monitor the National Weather Service for threats churning in the Atlantic Ocean.

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*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Analysis: Trump Claims Trade Victories, but Businesses Are Struggling Under His Approach

President Trump has spent the past week praising his new trade agreement with Canada and Mexico as a win for farmers, saying that the pact will send cash pouring into the United States and enrich America’s agriculture and industrial workers. However, many American businesses still face a cloud of trade uncertainty as Trump seeks to replace the North American Free Trade Agreement (NAFTA) with the new deal, the New York Times reported. The biggest concern: lingering tariffs on foreign steel and aluminum. The metal tariffs, combined with retaliatory taxes that foreign governments have placed on American products, are undercutting the concessions that Trump won in the deal. While the new trade pact gives American farmers greater access to Canada’s dairy market and requires that a higher percentage of a car be produced in the United States, business and trade groups are raising questions about whether the agreement will actually deliver the economic boost the president promises. “The celebration is muted because of the tariffs on steel and aluminum,” said David Ahlem, chief executive of Hilmar Cheese Company, a California-based dairy business with 1,400 employees. “I think many people expected those tariffs would go away as part of the deal, but there’s no clear path to that happening.” In response to Trump’s metal levies, Mexico hit American goods like cheese with 25 percent tariffs, stalling business in the industry’s largest export market.

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Don't miss the "What Effect Will Trade Wars Have on Industries and Restructurings?" session at the 2018 International Insolvency & Restructuring Symposium in Milan on Oct. 18. Register here.

Notice to All ABI Members

UNITE HERE Local 11 is a labor union based in southern California. They represent more than 20,000 workers in the hotel and restaurant industry. The union has been attempting to organize employees at the Terranea Resort, site of ABI’s 2019 Winter Leadership Conference (WLC). The union has repeatedly contacted ABI leadership, including members of the board and committee leaders, to urge ABI to cancel or move the WLC. ABI has no plans to move or cancel the event, which would result in substantial legal exposure. If you are contacted by phone or email by representatives of the union, ABI encourages you to ignore rather than engage or respond. ABI regrets this development and will continue to closely follow events at the property. This has no effect on the ABI’s 2018 WLC, set for Scottsdale, Ariz., this December.

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BLOG EXCHANGE

New on ABI's Bankruptcy Blog Exchange: The Good, the Bad and the Unknown in the Fed's Latest Rate Hike

The third interest rate increase of the year could have a significant impact on banks' lending, deposit-gathering and even M&A decisions, according to a recent blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

 
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