Cody Charfauros - Why some banks will fail
Identifying bank winners and losers as commercial real estate (CRE) values crash
Commercial real estate sponsors who took out floating rate loans are in trouble.
Rates have over doubled since their lows throwing many loans into technical defaults even if the borrower is keeping them current and their lenders aren’t (yet) marking them to market.
What this means is that many sponsors, especially those new to the real estate game (i.e. who entered during the bull run of the last 11 years), if they have not done so yet, are likely to stop distributions to their investors and will be searching for ways to save their deals from going back to the bank in foreclosure.
In a market downturn, like we have today, there are two types of sponsor: Those that underwrote conservatively, took on low debt, and were happy with lower projected returns because they knew their numbers were robust enough to weather the next, inevitable downturn. These sponsors will clean up during this downturn, buying distressed assets at significant discounts.
And then there were those who promised sky-high IRR’s just to attract investors, maximized the debt they took on so they could juice returns, used unrealistic rent increase assumptions, and underestimated the real impact of maintenance and tax costs in their proformas (amongst other things). These sponsors are toast.
And there are also two types of bank: those that are pragmatic and urgently seeking ways to clear their books of these potentially toxic loans before values fall any further and borrowers start going into actual default on loans, and those more confident the market will right itself and so are prepared to extend loans under more favorable terms with borrowers, kicking the can down the road.
With over $500 billion of bank/thrift originated CRE loans coming to maturity deadlines in the 12-months or so to mid-2024, the days of reckoning are upon the commercial real estate industry.
Even sponsors who took on short term, fixed rate loans are going to hit solvency walls and start losing assets to their lenders in foreclosure or find themselves forced to sell at substantial discounts to their (and their investors’) expectations.
If you want to be on the right side of this equation, listen in to my conversation with Cody Charfauros, Principal/MD at Slatt Capital a debt and equity shop.
Cody shares his own personal experience of the impact of dramatically increased debt costs and dives deep into market dynamics, giving you a roadmap for what to expect in the months ahead.
Listen To or Watch the Full Podcast Here
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