Unfortunately, my fears of another Great Recession might be on point. The mainstream business media picked up the same theme on Thursday and Friday, as the Dow lost ground. There will be some severe economic consequences from the coronavirus.
Even if COVID-19 never gets out of control in the U.S., hundreds of thousands of small businesses in China are in serious trouble, especially with tens of millions of their workers confined to their homes. The owners of most small businesses in China have no more than four months worth of operating expenses in savings, and small businesses employ 60% of China's workers.
And the thing is, many of these small Chinese companies manufacture parts for American companies. As a result, the worldwide supply chain has been shaken. We can't manufacture our own high-value goods without many essential parts coming from China. Container ships coming in from China are coming back only 25% full.
Clusters of COVID-19 are now out of control in South Korea (602 cases, 3 deaths), Japan (135 cases, not counting cruise ships), Italy (132 cases), and Iran (43 cases, 8th deaths). A worldwide pandemic is a virtual certainty.
I am writing this article on Sunday afternoon. It will be interesting to see if the U.S. stock market get hammered on Monday.
Now on today's training in commercial real estate finance.
In this week's FinFacts, a superb, free publication of George Smith Partners, one partner, after returning from this year's Mortgage Bankers Association Commercial Real Estate Finance ("CREF") Conference, wrote about the competitiveness of bridge lenders:
"Bridge Lenders: Floating rate bridge loan spreads used to be stratified, ranging from 2% to 6% over LIBOR, depending on the transaction dynamics. That's so 2017 (the old days). Now there's a race to the bottom occurring, with lenders bunched up at 2% to 4% over LIBOR. More and more of them are pushing to the bottom of that range."
"So how do lenders differentiate themselves? Deal structure, credit officers are casting a wider net (One lender even remarked: We will do some funky stuff), source of capital (mortgage REIT vs CLO execution vs leveraged debt fund), flexibility, certainty of execution (we met with senior committee members that stressed their lean and efficient approval process), and borrower costs (exit fees can be waived)."
"Warehouse line rates are compressing for debt funds, contributing to tighter spreads on loans and increased leverage. Lenders are more willing to listen to stories. For example: We will look at heavier risk for strong sponsors."
"Also, more heavy bridge loans (major renovation, unoccupied properties) are being priced almost like light bridge. As one lender remarked: No cash flow, no problem, for the right deal. Geographic: Secondary and tertiary markets are being considered, and the right deals are being priced tightly. Yet many high-yield lenders are still in business, now offering high-leverage, non-recourse construction loans or going very high up the capital stack. The net needs to widen as nearly every lender indicated that their marching orders are to increase production over 2019."
Okay, so what on earth is the difference between a heavy commercial bridge loan and a light commercial bridge loan?
A light bridge loan is where there is only some minor renovation and/or the property is a proven location. You may be able to negotiate a bridge loan at just LIBOR plus 2.0% or LIBOR plus 3.0%.
Examples of Light Bridge Loans:
A heavy bridge loan is one involving substantial construction and/or market risk. If you can even find an interested bridge lender, you may have to pay as much as LIBOR plus 4% or even higher.
P.S. I wonder if the Chinese Communist Party ("CCP") will survive this crisis. The average Chinese citizen despises the tight control of the CCP, but they tolerate it because the CCP has been improving their lives annually.
What happens when the growth rate in China plummets from 6% to 7% annually to a negative number? The largely-peaceful protestors in Hong Kong taught the Chinese people how to bring a government to its knees. Think this is a far-fetched scenario? Everyone was shocked at the speed at which the Russian Communist Party lost power. Could beautiful young Chinese girls soon be sticking flowers into the gun barrels of surrounding Chinese soldiers?
Most of you are too young to remember this, but when Russian soldiers and tanks surrounded the Russian pro-democracy protestors in 1991, led by Boris Yeltsin, some beautiful Russian girl started sticked flowers in to the gun barrels of the Russian soldiers. In less than an hour, the surrounding Russian army brigade changed sides and pointed their guns outwards, protecting the protestors.
Boys are so easy. :-)