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Weekly Wrap: Will flex-space opportunities trump current COVID-19 woes?

Short-term flex-office workshare provider Regus recently placed six of its New York-based properties into bankruptcy protection, bringing the total number of properties included in Regus Chapter 11 filings to more than 90.

The bankruptcy filings by RGS Group Holdings and some of its affiliates are unfurling as the impact of coronavirus-related vacancies and work-at-home policies for most companies are wiping out the short-term use needs of the workshare space field. (Regus has an estimated 1,000 flex-office locations in the U.S. and Canada).

The Regus filings are exposing the unique risks associated with flex-office collateral within commercial mortgage-backed securities, notably a mismatch of long-term mortgages taken out by sponsors supported by short-term, flexible leases of tenants that are more likely to go unrenewed in a downturn.

In recent years these workshare space locations have become a regular feature in conduit deals, but flex-office exposure in CMBS deals is still relatively small. Last year, Moody's Investors Service estimated properties tied to workshare company WeWork measured only 0.7% of the universe of CMBS deals rated by Moody's.

But exposure in individual deals can be significant. While unclear at the time how many properties were involved, "there are more than 50 properties in CMBS [deals] that have Regus' presence on the top-five tenant roster," according to a recent report from DBRS Morningstar. At least three deals involving Regus properties now under bankruptcy protection have Regus as the sole borrower and asset for the transaction, according to research from Deutsche Bank.

Last year, DBRS Morningstar cautioned about a Natixis-sponsored transaction with a 31.6% net-rentable space exposure to WeWork for the Wilshire Courtyard office property in Los Angeles owned by the Onni Group in Canada.

Within traditional conduit and single-asset CMBS deals, long-term mortgages secured by major office buildings located in urban central business district remain the largest asset type in deals at more than 27%, according to Moody's.

But analysts have noted that long-term, post-COVID trends may turn the tide back in favor of flex-office providers, at the potential expense of large downtown office buildings. Deutsche analysts noted that as remote office space needs grow for some companies as the pandemic wanes and on-site office needs re-emerge, firms have already discovered they do not need costly, centralized headquarters locations and office density to "preserve collaveration and 'work environment' productivity," Deutsche's Sept. 24 report stated. "Remote office space should fit some companies well."

Such a trend would support the strategy recently outlined by Mark Dixon, the CEO of the London-based parent of RGS Group, International Workplace Group.

"This global crisis has dramatically changed the ways companies will work," Dixon said in Aug. 4 comments for IWG's six-month performance update for 2021. "In the new world of working post COVID-19, offices will still be needed but there will be a greater requirement for more flexible space. More companies will have distributed workforces with more satellite offices, more employees working closer to home or continuing to work from home.

"With our decentralised portfolio of workplace locations in over 1,100 towns and cities, both urban and suburban, we are uniquely positioned to help companies adapt to a new world of working."

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Auto ABS: Delinquencies up, extensions continue decline
Payment extensions granted as part of COVID-19 economic relief efforts declined for a third straight month in July, according to S&P Global Ratings.

But July also represented the last month of enhanced federal unemployment benefits of $600 per week, a new report from the ratings agency reported.

Based on loan-level data filed with the Securities and Exchange Commission, extensions for prime loan shelves tracked by S&P dropped to 0.86% from 1.39% in June. For four non-prime issuers which file Reg AB II-related data - Exeter Finance, World Omni Corp., Santander Consumer USA and Americredit (GM Financial) - the extensions decreased to 5.29% from 7.66% in June.

Despite the decline, "extensions remained above pre-COVID-19 levels, at about 2.2x January's prime level and 2.6x January's subprime levels," S&P's report noted. "These abnormally high deferrals are distorting traditional performance metrics, causing losses and delinquencies to be lower than otherwise."

A majority of the loans granted COVID-19 extensions in March have since resumed payments: 82% in the prime sector and 64% in subprime.

Delinquencies of the previously extended loans are low, but data show they are growing month-over-month: 60-day plus delinquencies on prime loans that had been granted a holiday increased to 1.29% in July from 0.98% the month prior. For subprime, they increased to 3.46% from 2.16%. "We view this as a harbinger of future defaults," S&P warned.

Charge-offs from the previously extended loans remain low at 0.23% for prime and 0.43% for subprime. "However, these totals have increased from 0.08% and 0.12%, respectively, since June."
OCC reports surge in 'seriously delinquent' mortgages
WASHINGTON — An Office of the Comptroller of the Currency report suggested notable stress on credit quality in the mortgage portfolios of the nation's largest banks resulting from the COVID-19 pandemic.

The agency's second-quarter Mortgage Metrics said the performance of residential loans at seven banks with significant servicing portfolios had declined last quarter. Overall, 91.1% of first-lien mortgages were current and performing, which was down from 96.1% during the same period last year.

The decline was driven by a sharp jump in mortgages that banks reported as “seriously delinquent,” defined as more than 60 days overdue. The percentage of seriously delinquent mortgages jumped to 6.8% in the second quarter from 1.4% in the first quarter.

In the report, the OCC said that “seriously delinquent loans have increased as a result of the pandemic.”

At the same time, foreclosures remain unusually low as a result of the national moratorium in place since the early months of the COVID-19 pandemic. The OCC reported that its surveyed banks initiated foreclosures only 249 times in the second quarter of 2020, compared with nearly 20,000 in the first quarter — a drop of 98.7%.

The OCC estimates that the mortgage portfolios of national banks in its study represent $2.97 trillion in unpaid principal balances, or 28% of the nation’s outstanding residential mortgage debt.

Brendan Pedersen
Bankruptcy tracker: Filings hit pre-virus low on easy money
The pace of bankruptcy filings by large U.S. companies is the slowest since the Covid-19 pandemic began, doused by cheap funding that keeps even risky borrowers afloat.

“The level to which our market was propped up on cheap money is huge,” Nellwyn Voorhies, president of corporate restructuring services provider Donlin Recano & Co. Inc., said in an interview. “Those chickens are going to come home to roost,” Voorhies said, predicting a pick up in the pace of bankruptcies later this year.

Just nine companies with liabilities over $50 million have filed for bankruptcy so far in September. That puts the month on course for about 15 filings, down from 33 in May and an average of 26 from April to August.

Cash is flooding back into riskier assets, throwing a lifeline to failing companies that might otherwise be forced to seek Chapter 11 bankruptcy protection. Junk bond issuance is on track for a record year, as borrowers take advantage of investors chasing yield.

“High yield’s working its way back to pre-Covid levels and the appetite for risk is growing quickly,” John McClain, a portfolio manager at Diamond Hill Capital Management, said last week.

In the week ended Sept. 19, there were two filings by companies with more than $50 million in liabilities, including the owner of the New York Sports Clubs and Lucille Roberts gyms. Then on Sunday, auto-parts maker Garrett Motion Inc. filed for bankruptcy with plans to sell itself to KPS Capital Partners for $2.1 billion.

There have been 189 bankruptcy filings year-to-date by companies with more than $50 million in liabilities, according to data compiled by Bloomberg. That’s the most for any comparable period since 2009, when there were 271 in the full year, the data show.

Moody’s Investors Service warned in a report Monday that while many companies across the rating spectrum have found a relatively receptive credit market willing to extend liquidity, that doesn’t mean the companies suddenly have strong fundamentals.

“Addressing more immediate liquidity needs does not necessarily fix longer-term performance concerns,” the report states.

The total amount of distressed bonds and loans traded fell by 4% to $267 billion as of Sept. 18, the fourth straight week of declines. That’s down from $935 billion in March, data compiled by Bloomberg show. Volume of distressed bonds declined 2% while loans fell 8.1%.

Bloomberg News
California authority offering 3rd 2020 series of tobacco-settlement bonds
The California County Tobacco Securitization Agency is launching its third offering of bonds backed by tobacco company lawsuit settlement payments.

This latest series, totaling $36.5 million, involves Merced County-pledged tobacco settlement revenues, resulting from the master settlement agreement payments, and follow earlier series that were paid by revenues derived in Los Angeles and Sonoma counties.

The notes' preliminary ratings range from A to BBB-.

The bonds are secured by cigarette industry payments that 46 states as well as Washington, D.C., and five U.S. territories receive annually via a landmark 1998 master settlement agreement (MSA) that tobacco companies reached with attorneys general nationwide. The payments are as compensation for local government expenses stemming from health problems related to tobacco use.

But tobacco-settlement bonds have become increasingly risky over the years for investors. There si the "continued, and potentially greater, decline in cigarette shipments" as federal, state and local governments increasingly place higher excise taxes on the products. Regulations have also restricted the legal age to purchase tobacco to 21, and in the case of California, a forthcoming ban on menthol cigarettes in January.

Last year, S&P Global Ratings placed the ratings on 240 bond tranches of tobacco settlement notes on review for downgrade, following the release of a report from the National Association of Attorneys General (NAAG) indicating an accelerating decline in domestic cigarette sales volume. The ratings agency has not published an update since October 2019, when it stated the notes were still under a negative credit watch.
Domino pieces standing in a row. 3D illustration
Domino pieces standing in a row. 3D illustration.
New deal pipeline
Issuers filing ABS-15G registrations for new-issue U.S. ABS for the week of Sept. 18-Sept. 24 (per Finsight.com):

Imperial Fund Mortgage Trust 2020-NQM1 Imperial Fund 1 RMBS
FREMF 2020-K117 Mortgage Trust Freddie Mac CMBS
Container Leasing International, LLC TAL International Group EQIP
CMPS 2020-2 Compass Datacenters ESOT
CSMC 2020-RPL4 Trust Credit Suisse RMBS
BFLD Trust 2020-EYP Morgan Stanley CMBS
AMSR 2020-SFR5 TRUST BAF Securities Depositor RMBS
LendingPoint 2020-REV1 LendingPoint LLC ESOT
UPST 2020-3 Upstart Holdings Inc ESOT
REPS 2020-A Republic Finance ESOT
CSMC 2020-NQM1 Trust Credit Suisse RMBS
MSAIC 2020-2 Solar Mosaic Inc ESOT
BXGNT 2020-A Bluegreen Corp ESOT
Finance of America Structured Securities Trust JR2 MM Revolver LLC RMBS
Citigroup Mortgage Loan Trust 2020-RP1 Citigroup ESOT