Weekly Wrap: Fewer college football crowds mean more hotel woes

September 17, 2020 9:00 PM

The eyes of CMBS investors will be on Austin, Texas this fall...plus dozens of other major university towns where limited fan attendance and canceled football games threaten to further punish a hotel sector reeling from COVID-19.

As the college football season kicks off in certain parts of the country, hundreds of hotel properties located near major universities (and backing approximately $17 billion in loans held in commercial mortgage-backed securities) will be losing out on annual revenue usually garnered from visiting fans, alumni and hosting lucrative road-team accomodations because of pandemic-related restrictions.

Particularly impacted are hotels located near member schools of the nation's Power 5 conferences featuring powerhouse (and popular) football factories that generate millions during a handful of home games each fall.

DBRS Morningstar this week issued a commentary showing that 177 CMBS loans totaling $16.96 billion are secured by 291 hotels that are within five miles of university that is a member of the Big 10, Big 12, Pac 12, Southeastern Conference or the Atlantic Coast Conference.

While the campus towns in Big 12 territory have the least exposure with $943.4 million in hotel loans held in CMBS conduit or single-asset deals, nine of those loans representing 72.2% of the total balance are already delinquent or in special servicing.

Austin is the focal point, hosting 85% of the Big 12's delinquency or special-servicing exposure. The largest of those loans is the 1,048-kay Fairmont Austin Hotel (which secures a $300 million loan). The Fairmont loan is current, but it has been assigned to special servicing after the hotel was close between March and May, according to the ratings agency.

"While it is now open, the property and the overall Austin lodging market will continue to face near-term challenges," without having University of Texas football (and its average home attenance of 96,306) as its usual fall backstop, according to DBRS Morningstar. When the Longhorns take the field at nearby Darrell K Royal-Texas Memorial Stadium, the 100,000-seat capacity stadium will be restricted to 18,000 fans a game this year.

Besides limiting attendance, schools are also banning traditional tailgaiting gatherings of fans on campus grounds in efforts to contain COVID-19 spread.

The Pac 12 and Big 10 conferences postponed their 2020 fall athletic schedules including football earlier this year, although the Big 10 has sinced announced its members will begin playing football in late October.

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Global aviation ABS deals take ratings tumble

On Thursday, Kroll Bond Rating Agency announced it had downgraded 81 global aviation ABS securities and affirmed that ratings of 74 tranches within 55 transactions.

A day earlier, S&P Global Ratings downgraded 54 of 60 bond tranche ratings on 23 aircraft lease and aircraft-engine asset-backed securities deals it rates, amid concerns about ongoing uncertainties in global airline travel and operations amid the coronavirus pandemic.

According to S&P, the downgrades came after a six-month credit watch review that commenced in March, shortly after the COVID-19 outbreak began grounding flights and curtailing domestic and international travel across Europe, Asia and North America where most aircraft leasing firms contract their fleets.

S&P stated most lessors are confronted with the increasingly troubled financial health of airlines, which has led to a sharp drop in aircraft values and lease rates, as well as an array of requests for deferrals or delayed payments on rental contracts.

In its report, Kroll cited declining cash flows, delinquencies (ranging from 24% to 77%) and deferred lease payments by obligors for the leasing companies. Thirty-five of the transactions also had falling debt-service coverage ratios that triggered amoritization events.

Without lease payments (either deferred or skipped), lessors are unable to pay interest to ABS investors, resulting in rising overall loan-to-value ratios that affect credit quality on the securitized portfolios.

With a steep drop in travel demand – air traffic was down 70% year-over year on Aug. 17, per TSA Checkpoint data – airlines are also reconsidering their widespread use of leased aircraft, S&P noted, meaning a “significant portion” of planes in lessors’ fleets will be parked as they come off lease over the next 12 months.

“The impact of the pandemic on the sector is far more severe than both 9/11 and the 2008 financial crisis,” S&P’s report stated. “According to Collateral Verifications, at the end of July, 40% of the total aircraft fleet remained in storage.”

The downgrade actions are the second wave of downgrades from S&P,which in June lowered ratingson 23 tranches of notes in deals while affirming eight others.

Nicholas Speaks, president and chief executive officer of MBUSA, with the Mercedes-Benz AG fully electric EQC sport utility vehicle (SUV) during AutoMobility LA ahead of the Los Angeles Auto Show in Los Angeles, California, U.S., on Wednesday, Nov. 20, 2019. Engines are taking a back seat to motors at this years Los Angeles Auto Show as carmakers showcase the latest electric additions to their vehicle lineups. Photographer: Patrick T. Fallon/Bloomberg

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Auto-lease ABS hits overdrive

Daimler AG this week priced the first U.S. auto-lease ABS transaction since July, when it closed on the $1.01 billion Mercedes-Benz Auto Lease Trust (MBALT) 2020-B deal on Tuesday.

It was the first of three deals launched this month, according to ratings agency presale reports.

The MBALT deal, the second prime-auto lease securitization of the year for Daimler AB, included coupons ranging from 0.31% to 0.5% for three classes of term notes totaling nearly $850 million, according to market data published on Finsight.com.

All the notes were triple-A rated by S&P Global Ratings and Fitch Ratings.

Also marketed to investors was a $157 million money-market tranche of Class A1 notes.

The notes were secured by the account receivables from 28,897 leases underwritten by Mercedez-Benz Financial Services USA – a subsidiary of Daimler AG (OTCMKTS: DMLRY) – as well as the future resale values of the all-new leased vehicles with an average securitization value of $40,884.

The lease securitization – via Mizuho Securities, Credit Agricole, Wells Fargo, Barclays and BofA Securities – was the first auto-lease ABS since Tesla Inc. priced a $709 million transaction on July 30 and Ford Motor Credit offered a $1.4 million lease ABS deal on July 21.

Also this week, S&P published a presale on a planned $1.03 billion prime auto-lease securitization sponsored by Hyundai Capital America. The Hyundai Auto Lease Securitization Trust 2020-B has preliminary AAA ratings for three term-note tranches totaling $830.4 million, as well as a short-term A-1+ rating from S&P for a $142 million money market tranche and an AA+ rating for a Class B subordinate tranche totaling $52.94 million.

The Hyundai transaction is expected to close Sept. 23, with JPMorgan serving as lead underwriter.

The deal is the 20^thoverall lease transaction for Hyundai Capital America, and the second for 2020.

GM Financial is sponsoring its third lease-backed transaction of the year, featuring an exchange note that will be backed by a pool of leases with a securitization value totaling $1.36 billion, or $1.75 billion, if upsized. The deal has one of the highest average borrower FICO scores for a GMF lease deal at 776, compared to 771 in the most recent GMALT transactioin.

Federal Reserve Board Chairman Jerome Powell

Fed's actions will help drive ABS issuance in 4Q

The asset-based securitization market is headed for a rush of new deals by year’s end, thanks to the healthy levels of liquidity with investors and corporations and the Fed's decision to stand pat on funds rate and market-support initiatives.

In a fixed-income research report from Wells Fargo, analysts believe that forthcoming new-issue deals will continue to fill the pipeline across several structured-finance asset classes through the end of the year.

“[A] combination of low yields and elevated borrowing requirements have driven a surge of fixed income issuance,” stated Wells’ cross-asset report published Thursday. “Despite the supply deluge, cash balances remain in solid shape for consumers, corporations and investors, providing unprecedented technical support to valuations, even at historically low yields.”

Wells also cited this week’s “dovish” policy statement from the Federal Reserve’s Open Market Committee that it will keep the near-zero Fed Funds target rate (0%-0.25%) unchanged while maintaining monthly asset purchases.

This will maintain technical tail winds behind agency MBS, CLO and leveraged-loan issuance, Wells’ report stated.

That issuance may come out strong in the first few months of the quarter, however, as investors and issuers look to complete deals prior to the outcome of the presidential election. According to a report by Deutsche Bank also out this week, research analysts noted a historical trend in both 2012 and 2016 where the ABS market saw a distinct "pull-forward" effect on supply ahead of election day.

While 88% of annual ABS issuance in any given year since 2010 has been priced by the end of October, that figure bumped to 89% in 2012 and was even more pronounced at 92% in 2016.

Deutsche's theory was boosted by the more than $9.25 billion in new ABS deals priced this week. The transactions included four subprime auto transactions (Exeter Finance, DriveTime Automotive Group, CIG and Santander Consumer USA) and a trio of consumer loan securitizations by Upstart Network, Liberty Lending and Regional Management.

CLO spreads show signs of recovery

Money managers are selling collateralized loan obligations at yields that would have been unthinkably low just a few days ago, signaling that one of the more battered corners of the credit market may be healing amid the Federal Reserve’s unprecedented support for company debt.

Ares Management Corp. is marketing a CLO that is expected to carry a risk premium, or spread, of just 1.28 percentage point more than the benchmark on its highest-rated portion, according to people with knowledge of the transaction. BlackRock Inc. sold a deal on Thursday with AAA notes yielding 1.27 percentage point more than the London interbank offered rate.

Collateralized loan obligations, or bonds backed by portfolios of leveraged loans, have been one of the last areas of corporate debt market to recover after security prices broadly plunged in March. As the Covid-19 pandemic weighed on company revenues, ratings firms began downgrading leveraged loans, which in turn spooked investors in CLOs. Even as recently as earlier this week, the risk premiums on KKR & Co.’s AAA notes priced at 1.5 percentage point more than Libor.

Spreads in Europe are similarly narrowing, with AAA risk premiums as much as 0.2 percentage point tighter than they were in August. For U.S. deals, the healing in recent weeks has come in part because asset managers have sold so few new CLOs, according to a Wells Fargo & Co. report dated September 9. August only saw $3.9 billion of new CLOs versus more than $9 billion in July, according to Bloomberg data.

“We believe AAAs are still too wide, relative to the rest of the CLO capital stack,” wrote the Wells Fargo analyst team led by Dave Preston.

There are other drivers. Ratings firms have been downgrading fewer leveraged loan borrowers, and even upgrading some. With the Fed cutting borrowing rates to near zero and supporting the investment-grade corporate bond market, some investors are looking for higher returns, and CLOs can be a good place to get that yield, said Jason Merrill, a strategist at Penn Mutual Asset Management.

Of course, before the pandemic, spreads were even tighter, often between 1.17 percentage point and 1.3 percentage point. Libor was much higher then, at around 1.7 percentage point in February compared with about 0.25 percentage point now. So total yields for investors are lower now.

And the securities are different now, too: before Covid-19, the money managers that put together these deals could buy and sell loans in the portfolio for five years, but in the last few months it’s been three years, which reduces risk for investors. Market participants anticipate new CLOs to soon come with four years of reinvestments.

Only the top-tier managers are expected to sell AAA CLOs at spreads of 1.3 percentage point or less. Other asset managers are looking to sell their AAA portions at spreads closer to around 1.35 percentage point, according to the people with knowledge.

Bloomberg News

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New deal pipeline

Issuers filing ABS-15G registrations for new-issue U.S. ABS for the week of Sept. 11-Sept. 17 (per Finsight.com):

NAME	SPONSOR/SELLER	SECTOR
Vivint Solar Financing VII, LLC	Vivint Solar Inc	Esoteric
VSLR 2020-1	Vivint Solar Inc	Esoteric
RMF Buyout Issuance Trust 2020-HB1	Reverse Mortgage Funding	RMBS
J.P. Morgan Mortgage Trust 2020-LTV2	JPMorgan Mortgage Acquistion	RMBS
BDS 2020-FL6 Ltd. & BDS 2020-FL6 LLC	Bridge Debt Strategies Fund III	CMBS
Shawnee 1892 LLC	Security Benefit Life Insurance Co.	Esoteric
Progress Residential 2020-SFR3 Trust	Radian Real Estate Management	Esoteric
FREMF 2020-K116 Mortgage Trust	Freddie Mac	CMBS
KEY Commercial Mortgage Trust 2020-S3	KeyCorp	CMBS
BANK 2020-BNK28	Wells Fargo	CMBS
Laurel Road Prime Student Loan Trust 2020-A	KeyCorp	SLAB
Honda Auto Receivables Owner Trust 2020-3	Honda Motor Co Ltd	Auto ABS
GM Financial Automobile Leasing Trust 2020-3	General Motors Company	Auto ABS
Pawnee Equipment Receivables LLC 2020-1	Chesswood Group Ltd	EQIP
Octane Receivables Trust 2020-1	Octane Lending	EQIP
Vantage Data Centers Issuer, LLC 2020-1/2	Vantage Data Centers, LLC	Esoteric
Vantage Data Centers Canada, LP	Vantage Data Centers, LLC	Esoteric
GS Mortgage-Backed Securities Trust 2020-PJ4	Goldman Sachs	Esoteric
Enterprise Fleet Financing LLC 2020-2	Enterprise Rent-A-Car	Esoteric
Nissan Auto Lease Trust 2020-B	Nissan Motor Co Ltd	Auto ABS
Hyundai Auto Lease Securitization Trust 2020-B	Hyundai Capital America	Auto ABS