The sudden purchase of Credit Suisse by rival UBS over the weekend stunned the finance world and created new questions about the true extent of a banking crisis that began with U.S. regional banks and now has a global shadow.
UBS acquired Credit Suisse on Sunday for roughly $3.25 billion, just days after Switzerland’s Central Bank provided Credit Suisse with a $54 billion capital injection on March 16 to quell the concerns of worried investors. The deal, which was brokered by the Swiss government, received support from Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen, who released a joint statement Sunday shortly after the acquisition became public.
“We welcome the announcements by the Swiss authorities today to support financial stability,” Yellen and Powell said in the statement. “The capital and liquidity positions of the U.S. banking system are strong, and the U.S. financial system is resilient. We have been in close contact with our international counterparts to support their implementation.”
The precipitous fall of Credit Suisse — a Switzerland-based megabank which had roughly $1.3 trillion worth of assets under management at the end of 2022 — came after Credit Suisse saw its stock drop by nearly 70 percent on the SIX Swiss stock exchange over a span of six days, beginning March 14. The 167-year-old financial institution had a market cap as high as $78 billion in 2009, according to MarcoTrends.net.
Credit Suisse shares were trading at less than a single Swiss franc Monday morning.
The Swiss government agreed to provide roughly 100 billion Swiss francs to UBS to facilitate the deal, an amount equal to nearly $108 billion in U.S. dollars.
“An acquisition is definitely a better outcome than a failure, so in that sense it’s good news,” said Alexi Savov, professor of finance at NYU Stern School of Business. “Whether the price is right, I don’t know, but I think it’s remarkable given Credit Suisse’s market cap over the years. Given where we are now … it’s much better to have an acquisition than a disorderly liquidation.”
But Credit Suisse bondholders are now feeling pain from the banking behemoth’s demise. Parameters of the deal included writing down roughly $17 billion worth of tier one AT1 bonds — or hybrid bonds that sit just below common equity tier one capital, banks’ primary source of capital — to zero.
Justin Kennedy, co-founder and managing partner of 3650 REIT, said this decision by Swiss regulators to write down tier one bonds to zero could harm market conditions going forward.
“They decided to wipe out that capital as a fiat decision of the regulator to make the UBS deal happen. I think that’s bad for the market,” Kennedy told CO.
Kennedy noted, however, that both the Dow Jones Industrial and S&P 500 stock indexes reacted favorably to the news Monday morning, and that the deal made by UBS and Swiss regulators was the only possible solution given the turmoil Credit Suisse quickly found itself in.
“For the Credit Suisse situation, this was the most likely and powerful outcome for the market that most people expected,” Kennedy said. “The second [option] was the Swiss themselves would take it over and try to recapitalize, because there’s just not an organization in Switzerland that could do it. They weren’t going to do it with Deutsche Bank.”
While the acquisition of Credit Suisse was made to calm markets and restore faith in the banking system, it remains unclear how the purchase will impact the commercial mortgage-backed securities market going forward.
Following the purchase, Barclays analysts Lea Overby and Anuj Jain issued a report that analyzed CMBS tenant exposure to both UBS and Credit Suisse and the overall market fallout for CMBS securities following the purchase.
“AAA spreads look relatively cheap, but we expect CMBS spreads at the top of the capital stack mostly to move in line with the broader markets,” Overby and Jain wrote. “However, we believe BBB- bonds bear substantial risk of underperforming, given the continued drumbeat of negative news for CRE assets.”
The buildings carrying tenancy exposure to UBS and Credit Suisse include 11 Madison Avenue and 787 Seventh Avenue in New York City, One North Wacker Drive in Chicago, and One Stamford Forum in Stamford, Conn.
3650 REIT’s Kennedy was not optimistic about the current state of commercial real estate (CRE) lending. He noted that shrinking assets is the most likely path regional banks will take in the face of fleeing deposits, loss of confidence and higher interest rates, and that the office sector of CRE is an “out-of-favor asset class.”
“If you look at CMBS, everybody is talking about office sector risk, but we’re really just at the beginning of that,” Kennedy noted. “You can see it in the delinquency rate: It’s less than 4 percent, and it went to 10 percent in the Global Financial Crisis and 10 percent in the pandemic, and we’re still in the [3 percent range].”
“By any standard, there’s pain to come in the true credit sense of real estate, which is going to impact the banks further, particularly the smaller and regional banks where commercial real estate [comprises] a larger percentage of assets,” he added.
Brian Pascus can be reached at bpascus@commercialobserver.com.
We were thinking a lot about the great Lloyd Bridges (1913-1998) last week and his performance as the decisive, fast-talking air traffic controller in Airplane! who keeps his head together thanks to a seemingly endless supply of vices. (Looks like I picked the wrong week to quit smoking, drinking, dropping amphetamines and sniffing glue, he says as he tries to land a plane with no pilot. Maybe he could have just kept the first one until his particular crisis had passed.)
Because, truth be told, we were reaching for the Elmer’s over the course of the last nine days.
Just a few days earlier we were beating our breast about the flood of recent defaults from some of the top names in the industry. And while the crying is not over by any means (on Wednesday another Blackstone loan for $325 million went into special servicing) we didn’t know how good we had it.
On Friday, March 10, with scarcely any warning, Silicon Valley Bank collapsed in what was essentially a classic run on deposits. It was the largest bank failure since the Global Financial Crisis, and potentially so damaging that the federal government couldn’t even wait until the weekend was over to step in and try to find a home for SVB’s assets. But even that proved too late.
By Monday morning the contagion had spread and regulators shut down Signature Bank, which was one of the biggest CRE lenders in New York. (Its head, Joseph Fingerman, ranked 45 on Commercial Observer’s list of the 50 most powerful names in finance.)
The Federal Deposit Insurance Corporation and other regulators began scrutinizing at least 20 regional banks — and, even if the feds weren’t worried about them, their customers certainly were.
Almost immediately, private lenders began fielding calls from panicky borrowers with loans scheduled to close on deals from regional banks that borrowers were now looking for backup financing on.
“Post-Dodd Frank, with all the regulatory changes, there has been a trend towards private capital markets, and this will only accelerate that,” said Seth Weissman, one such lender at Urban Standard Capital. “The veneer of stability has definitely worn quite thin, and, especially for transitional loans where the duration may only be 12, 24 or 36 months, more and more people are gravitating toward the private markets, and I think that will continue.”
One bank that raised obvious concerns was the San Francisco-based First Republic Bank, which was heavily patronized by tech and venture capital firms — the same client profile as SVB. During trading last Monday, the bank’s stock dipped by as much as 62 percent before making up some ground. By the middle of the week the bank needed a rescue package from rivals such as JPMorgan Chase, Bank of America, Citigroup and Wells Fargo, and the federal government.
But this wasn’t a U.S. problem any more. Credit Suisse needed a bailout to the tune of $54 billion from Switzerland’s central bank to stave off collapse.
Of course, there are many more ramifications and concerns well beyond the banks themselves. CMBS loans are now being threatened. And proptech investors are getting nervous.
“We don’t even bank with SVB, but I’m angry right now,” Sonny Tai, the CEO at Actuate, a Manhattan-based security analytics proptech startup, said on LinkedIn. “Imagine being a founder or an early employee and having your company that you’ve poured years of your life building killed by a bank run because panicked venture capitalists went and created a stampede by telling their portfolio companies to pull their deposits.”
Meanwhile, over in Europe…
SVB, Signature Bank, First Republic and all the rest were nervously being buzzed about across the pond where tens of thousands of real estate professionals from hundreds of companies crowded into the Palais des Festivals in Cannes for the MIPIM conference, even if SVB wasn’t on the official agenda.
As for said agenda, ESG was very much on it. And, if SVB made you nervous, well, you might have to take a Valium when you heard some predictions of the future.
“Every single building out there — home, office, factory — it can’t withstand climate change,” warned writer and economic theorist Jeremy Rifkin during the conference’s keynote. “We have to retrofit every single building in the world so that it can be zero emission and that it can withstand all of the climate disasters that are coming.”
How to finance some of the more costly retrofits is the big question. But one of the more heartening things we heard in that respect is that the New World is expected to punch its weight with its Old World counterparts in the near future.
“I think the U.S. will overtake [Europe] when you finally realize what a huge opportunity this is,” Peter Cosmetatos, the CEO of the Commercial Real Estate Finance Council Europe, said on a panel titled “Financing ESG”. “Because the U.S. just has the capital markets, it has the innovation, and it has the technology. We need the head start in Europe.” (Speaking of innovation, apparently, there’s a lot more European creative thinking in proptech than we were previously aware of. Aaron Block was on hand to explain it.)
Retrofitting is the name of the game in respects well beyond ESG. (While it’s not related to MIPIM, CO has an interesting look at One Wall Street, which could serve as a test case for developers who want to convert from office to residential.) One of the more interesting theories that we heard about America’s fading office stock was that it wasn’t COVID that destroyed it. The office sector was already in a great deal of trouble, but we just didn’t know it.
How come?
“A lot of what looked like office demand in the sector — not just in the United States but all around the world — was WeWork leasing,” said Bradley Weismiller of Brookfield Asset Management on a panel about the future of office. “That was making it appear to be much more balanced.” (Neumann!)
Premium Class A office is still attractive to investors like, say, Commerz Real (a branch of Commerzbank) whose CEO Henning Koch was on hand at Cannes and sat down for an interesting conversation with CO. But, for the most part, attendees were more interested in niche asset classes that no longer seem niche, like cold storage, data centers and outdoor industrial centers.
“In the past, [investors] were like, ‘I just don’t understand it, that’s not institutional, I won’t go into it,’ ” said Shawn Lese, the chief investment officer and head of funds management for Nuveen. But now, investors are seeking those classes out.
Hooray for Hollywood!
As battered as the market felt over the past week, we were surprised that some real eye-catching dollar figures were injected into CRE — including in an area that we would have previously classified as niche: film studios.
Fox Corporation announced that it was pouring $1.5 billion into significantly expanding the Fox Studio Lot in Century City, which would add about 1.6 million square feet to the already sprawling property.
Greystone put more than a quarter of a billion dollars into financing The Beacon, a six-building multifamily project in Jersey City owned by Building and Land Technology.
And BentallGreenOak and Slate Property Group scored nearly that much ($248 million) for The Biltmore, their luxury apartment tower on West 47th Street and Eighth Avenue.
Werwaiss Properties managed to snag a $131 million construction loan for its Long Island City tower at 23-10 42nd Road from Corebridge Financial and PCCP.
Oh, and Shake Shack took a 3,380-square-foot lease at Penn Station. Now, that’s something to get happy about!
Relax. Have some coffee.
As you shake off the hangover (oh, yeah — Happy St. Patrick’s Day weekend), if you stop at your local Starbucks, you should pay homage to the superbroker that got it there. (At least if you live in Manhattan.)
We’re talking, of course, about TSCG’s David Firestein, who’s been working with the java purveyor for three decades. He sat down with CO (at the Empire State Building’s Starbucks, naturally) and discussed coffee and retail leasing.
Next week will be better.
WIZZ Air today predicted it was on track for a record summer, even as it fought pilot shortages, spiralling fuel costs, travel chaos at airlines and warned that customers face price rises of at least 10%.
The Ryanair rival, which flies to cities across Europe as well as North Africa and the Middle East, made losses for the year to March of e642 million (£550 million).
That follows an e576 million loss for the previous year – part of a wider picture of many billions lost by the airline sector due to Covid.
Wizz Air carried more than 27 million passengers in the year, up from 10 million last time, as travel opened up. It plans to go for it this summer.
CEO Jozsef Varadi said: “We stand ready to deliver our largest ever summer flying programme and the fastest growth in the industry, enabled by more than 6,000 colleagues across the business.”
Banks under pressure, Melrose surges 7%
GKN owner Melrose Industries leads the FTSE 100 index after it announced plans to return £500 million through share buybacks.
The aerospace-to-automotive engineering conglomerate surged 7% in a session when the FTSE 100 index stuck close to its opening mark at 759. Next and JD Sports Fashion also featured on the risers board, putting back their losses from the previous session.
Banking stocks fell after the Credit Suisse profits warning, with HSBC and Standard Chartered down 2% and 1% respectively.
In the FTSE 250 index, defence countermeasures business Chemring dropped 7% and Wizz Air eased 2% following their respective interim and full-year results. Frasers Group and Marks & Spencer rose 2% as the FTSE 250 overall held firm at 20,398.
Wizz Air encouraged by booking trends
Wizz Air today reported a full-year loss of 642.5 million euros (£546.7 million) and said it expects to be in the red for the current quarter.
However, the low-cost operator is encouraged by recent booking trends.
It said: “Summer demand indicators remain excellent at this point, supported by strong consumer dynamics: an urge to travel, improved household savings ratios in key markets, near-full employment and wage inflation.”
Capacity growth for the first two quarters of the financial year is expected to top 30% and 40% respectively, enabled by a fleet of 182 aircraft.
Chief executive József Váradi added: “The industry is witnessing supply chain issues across airports, including in our network.
“Shortages of staff in air traffic control, security and other parts of the supply chain are impacting airlines, our employees and our customers directly. We are deploying extra resources to minimise disruptions and urge all other stakeholders to do the same.”
Credit Suisse warns of Q2 loss
Credit Suisse has warned of a second quarter loss due to the impact of challenging trading conditions on its investment bank operation.
It said a combination of factors including the Ukraine war, rising interest rates and the unwinding of Covid stimulus measures had created heightened market volatility, weak customer flows and client deleveraging, notably in the Asia Pacific region.
The Swiss bank said low levels of capital markets issuance and a widening in credit spreads had also depressed the investment banking performance in April and May, leading to a loss for the division and for the wider group in the second quarter.
It added: “As we look forward to the second half, the year 2022 will remain one of transition for Credit Suisse.
“Given the economic and market environment, we are accelerating our cost initiatives across the group with the aim of maximising savings from 2023 onwards.”
Asia markets rally, FTSE 100 steady
Asia’s main markets have moved higher after Wall Street recovered from a weak start to record a second positive session in a row.
Hong Kong’s Hang Seng index reached a two-month high by lifting 1.5% and the Nikkei is at a 10 week peak following better-than-expected figures from Japan’s economy.
US markets rallied after Europe’s close, with the Dow Jones Industrial Average, S&P 500 and Nasdaq all finishing the session up by almost 1%.
Wall Street’s improvement came despite retailer Target cutting guidance as it warned that this quarter’s operating margin will be around 2% amid the need for price cuts to reduce inventory.
The calm reaction to the warning reflects the focus on Friday’s US inflation reading, which if higher than the 8.3% forecast may stoke interest rate expectation later this year.
Michael Hewson, chief markets analyst at CMC Markets, said traders continue to sway between recession fears and hopes of a soft landing for the US economy.
He added: “While we’ve seen a modest rebound in equity markets, there remains a significant overhang of uncertainty as to how much further this rebound has to go.”
CMC expects the FTSE 100 index to open 20 points higher at 7,618, having posted a moderate decline yesterday.