Senior Fixed Income Strategist, Saxo Bank Group
Summary: Similarly to the Global Financial Crisis, this crisis will also be ignited by subprime mortgages. However, it will stem from commercial real estate rather than house prices. As the economy gets disrupted by more restrictions imposed by a new Covid-19 outbreak; commercial backed security delinquencies and special servicing rates will continue to rise, causing big losses among many financial institutions. Seven out of the ten biggest U.S. CMBS holders are pension funds and insurers, pointing to the fact that the first to suffer will be our retirement plans.
The word "recovery" has become meaningless amid a new wave of Covid-19 cases. New lockdown measures are causing a bigger hole into the economy, and we are helplessly seeing a recession getting worse by the day. At this point, the market is starting to realize that bulls are irrational, while bears might be well-positioned for what's to come. Although a blow to the economy caused by new restrictions is clear, what is not obvious is what will be the event that will cause the market to plummet. In 2007, the subprime mortgage crisis in the United States was the catalyst for a widespread global financial crisis. This year, a crisis will most likely develop from Commercial Mortgage-Backed Securities.
According to Trepp, CMBS delinquency and special servicing rates are catching up to the high levels we have seen during the Global Financial Crisis.
Even though delinquency rates look in decline since July's peak, in reality, what is happening is that some loans have been granted forbearances. Therefore, from delinquent, the loan status is updated to current; still, those loans will continue to be specially serviced. Only in a few months, it will be possible to appreciate if these businesses have been able to service their loan. Therefore, underlying data might be worse than what we are observing now as there is an element of shadow delinquency.
The businesses that are suffering the most amid the Coronavirus crisis are in the hospitality and retail sectors.
This also explains why loan delinquencies' hardest-hit cities in the United States correspond to those with a higher number of shops and hotels.
Unfortunately, I wasn't able to identify the holders of CMBS hit explicitly by the Covid-19 pandemic. However, I was able to find out which companies are the biggest holders of U.S. CMBS. This way, it's possible to have an approximate idea of which will be the companies that can be most impacted by an increase of delinquencies in commercial real estate loans.
Within the top ten biggest holders of U.S. CMBS, we find seven pension funds and insurers.
On that note, there is only one question on my mind: are they too big to fail?
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