Empty US hotels increase pressure on debt investors

Hotel property owners across the United States failed to make payments on about a quarter of their mortgages that are bundled into debt deals last month as measures to slow the spread of the coronavirus caused a total collapse of income.

The travel and entertainment industry has been at the center of the fallout from the $ 1.3 billion Commercial Mortgage Backed Securities (CMBS) market, where home loans are used to create new bonds with varying levels of debt. exposure to default risk.

As hotels emptied to contain Covid-19, it put pressure on the ability of homeowners to service their mortgages, ricocheting all the way to the CMBS deals backed by those loans.

According to data compiled by JPMorgan, only 76.3% of hotel properties in CMBS transactions were up to date with their mortgage payments in April. In March, the share was 95.8 percent.

Other CMBS industries have seen borrowers struggle to make payments. In the retail sector, the number of to-date borrowers fell from 96.3% in March to 88.5% in April, while office buildings registered a decline of less than 1%.

Manus Clancy, New York-based research manager at Trepp, a CMBS data provider, said if the trend continues for another month, “it could surpass the worst we’ve ever seen in this market by reverting to the financial crisis or after 9/11 “.

JPMorgan also noted that the amount of loans moving to “special service” status – where a loan is transferred from the company responsible for transferring mortgage payments to investors, to a third party chasing late payments – has increased to 10 , $ 4 billion in April, against just $ 800 million in March, for the entire CMBS market.

Fitch Ratings expects that number to rise in May, as payments due in April are more than 30 days past due, pushing them into delinquency.

One loan with special service status, according to DBRS Morningstar, a rating agency, is a $ 329 million loan on the Palmer House Hilton in downtown Chicago, which has been closed since March. The loan was transferred after the owner of the building, Thor Equities, said he would not make his April mortgage payment.

The pressure on borrowers has hit the lower rated tranches of CMBS operations which are more exposed to potential default by the underlying borrowers. The Hilton property is the only loan on the basis of a JPMorgan CMBS 2018 deal in which the triple-B tranche fell to 72 cents on the dollar, for example, from nearly 100 cents on the dollar in early March.

More generally, the additional yield above a benchmark swap rate on 10-year triple B-rated tranches rose to 9.8 percentage points, according to data from JPMorgan. This is almost 7 percentage points more than at the start of the year.

Some investors are concerned that even if the economy begins to reopen, with people allowed to return to work, it may be some time before travelers start booking rooms at hotels again. Many are also concerned about the outlook for the retail sector, if shoppers stay away from crowded malls.

“Retail and hospitality are of great concern,” said Gunter Seeger, portfolio manager at PineBridge Investments in New York. “It could have ripple effects for a long time if people are afraid to go to stores, for example. Many tenants will fail and you will end up with empty, dark buildings. “

Carol M. Barragan

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