Brief: KKR & Co. has raised $950 million for a fund dedicated to buying the riskiest slices of new commercial mortgage-backed securities as it expands in a part of the market that has been battered by the Covid-19 pandemic. The firm closed KKR Real Estate Credit Opportunity Partners II, a successor fund to a $1.1 billion vehicle it raised in 2017 to buy so-called “B-pieces” of CMBS. Such slices are the first to take losses when mortgages underpinning the securities sour. KKR is among the most active buyers of B-pieces, which banks and other financial institutions often seek to offload at steep discounts. Risk-retention regulations mandated by the 2010 Dodd-Frank Act require market participants to keep slices of CMBS as a form of “skin in the game,” though they’re allowed to sell the portions to third parties like KKR that hold the securities on their behalf. In the first half of 2020, B-piece buyers purchased about 60% of deals’ required risk-retention portions. KKR has invested more than $1.25 billion in the securities since 2017. Junior portions of CMBS have dropped this year as investors fret about the future of commercial real estate amid a pandemic-induced economic slowdown.
Brief: Hedge fund position-taking in crude and products remains desultory as uncertainty about the future direction of prices and the course of the coronavirus pandemic compounds the normal summer-time trading slowdown. Hedge funds and other money managers purchased the equivalent of 24 million barrels of futures and options in the six most important oil futures and options contracts in the week ending on July 14. Purchases reversed sales of 21 million barrels the previous week, extending a slight rise in petroleum positions evident over the last month, after a much stronger upward trend over the previous two months. Last week’s purchases were concentrated in Brent (+11 million barrels) and European gasoil (+7 million) with smaller buying in NYMEX and ICE WTI (+1 million), U.S. gasoline (+5 million) and U.S. diesel (+1 million). The European focus may reflect concerns about the resurgence of coronavirus and its potential impact on oil consumption in the United States.
Brief: Investors are searching for bargains in the world of U.S. small-caps, as the beaten-down asset class prepares for what may be the worst earnings season in its history amid a resurgent coronavirus pandemic. Small-cap companies are expected to post a year-over-year earnings declines of approximately 90% as companies report their second-quarter results over the next several weeks, compared to a 67% hit for mid-caps and 44% for large-caps, according to Jefferies. That would be the largest drop since the fourth quarter of 2008, data from S&P Dow Jones Indices showed. While some investors had counted on a third-quarter rebound, many are now concerned that potential coronavirus-fueled economic shutdowns in California, Florida and Texas will deal a disproportionate hit to smaller firms, which are more directly tied to domestic spending and have been among the biggest beneficiaries of stimulus measures delivered by the Federal Reserve and Congress. People fear a “‘Night of the Living Dead’ of small-cap companies that would otherwise go bankrupt without the benefit of the stimulus and record-low interest rates,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.
Brief: Global real estate investment fell by 33% in the first half as the coronavirus pandemic battered economies and disrupted deals. The Asia-Pacific region took the biggest hit, with volumes down 45% from the year-earlier period, because it was the first struck by the outbreak, according to a report from broker Savills Plc. Investment dropped by 36% in the Americas and 19% in Europe, the Middle East and Africa. With the tourism industry shut down for months by government lockdowns, hotels saw investment decline by 59% in the first half of the year, followed by a 41% drop for retail properties, according to the Savills report. Industrial and residential properties fared better. Investment is “expected to remain well below pre-pandemic levels for the rest of 2020 as investors wait for market clarity,” Simon Hope, Savills head of global capital markets, said in a statement on Monday. “However, certain sectors are expected to outperform as investors focus on secure assets, namely logistics, residential and life sciences.” The International Monetary Fund has forecast that global gross domestic product will shrink 4.9% this year as the pandemic wears on. IMF chief economist Gita Gopinath has said the cumulative loss for the world economy this year and next as a result of the recession is expected to reach $12.5 trillion.
Brief: Attempting to forecast the path of the American economy right now is like peering into a dark well — nobody knows how deep the hole goes. Even Jamie Dimon, CEO of JPMorgan Chase and veteran prognosticator of all things financial, is flummoxed. As head of the financial system’s bellwether, a bank with $3.2 trillion in assets that serves almost half of U.S. households and a wide swath of its businesses, Dimon has a unique vantage on the world’s largest economy.“The word unprecedented is rarely used properly,” Dimon said this week after JPMorgan reported second-quarter earnings. “This time, it’s being used properly. It’s unprecedented what’s going on around the world, and obviously Covid itself is a main attribute.” More than four months into the coronavirus pandemic, the financial damage wrought by the outbreak has yet to fully register. Take JPMorgan, for instance: The bank added $15.7 billion to reserves for expected loan losses in the first half of this year. But second-quarter loan charge-offs in its sprawling retail bank actually declined 3% to $1.28 billion, or roughly the same level seen before the virus.That’s because the $2.2 trillion CARES Act injected billions of dollars into households and businesses, masking the impact of widespread closures. As key components of that law begin to phase out, the true pain may begin.
Brief: Private equity-backed companies are driving defaults in the Covid-19 recession, with companies owned by Blackstone Group, KKR & Co., and Apollo Global Management among those that have run into trouble, according to Moody’s Investors Service. More than half of companies that defaulted in the second quarter are owned by private equity firms, Moody’s said in a report this week. For example, Blackstone-backed Gavilan Resources and Apollo’s CEC Entertainment filed for bankruptcy, while KKR’s Envision Healthcare Corp. defaulted through a distressed debt exchange. U.S. defaults have more than tripled since the end of the first quarter, as companies with buyout debt proved vulnerable in the downturn, according to Moody’s. The credit rater expects the default rate to keep rising to about 12 percent next year as it continues to be fueled by private equity-owned borrowers, according to Moody’s analyst Julia Chursin, who spoke toII by phone Friday. Chursin said that private equity firms, being skillful financial engineers, will try to avoid bankruptcy through distressed debt exchanges. While still constituting a default, debt swaps can help buyout firms salvage their equity stakes as the company’s lenders take a haircut.