Juggling Dynamite

Danielle was a guest with Jim Goddard on Talk Digital Network, talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here.

The chart below shows the bulge of US corporate debt (investment grade in orange and junk quality in blue) coming up for maturity quarterly through 2032.
Commercial real estate loans account for 30% of assets at small banks, compared with just 7% at bigger lenders (chart courtesy of EPB Macro below).  These issues are not contained in North America. See, German bank braces for wave of bad loans in ‘greatest real estate crisis since the financial crisis’:

Shares of PBB, the second German bank to warn of mounting losses on commercial real estate in two weeks, have slumped 17% since Friday. The stock has tumbled more than 25% so far this year and 40% in the past six months.

Germany’s biggest lender Deutsche Bank said last week that it had allocated €123 million ($133 million) during the fourth quarter of last year to absorb potential defaults on its US commercial real estate loans. That’s more than quadruple the amount it set aside during the same three-month period in 2022.
The Aozora Bank headquarters in Tokyo Japan, on February 1, 2024. The bank’s shares fell over 21% after it said it had made losses on loans tied to US commercial real estate.

Banks as far apart as New York, Tokyo and Zurich have also reported mounting losses on lending to the troubled commercial property sector in recent days.

On Wednesday, New York Community Bancorp attempted to reassure investors that it has enough cash to stay afloat after the stock shed about 60% of its value over the past eight days and ratings agency Moody’s downgraded the bank’s credit grade to junk.

Last week, the troubled US regional lender reported a surprise $252 million loss for the fourth quarter, a big chunk of which was tied to loans for office buildings. It also set aside $552 million in the quarter to absorb potential losses on loans, up sharply from $62 million in the previous quarter.

Also last week, Japan’s Aozora Bank said bad loans tied to US offices were partly to blame for its projected annual loss of 28 billion yen ($190 million) last year. And Swiss private bank and wealth manager Julius Baer said profit slumped 55% in 2023 because it lost 586 million Swiss francs ($680 million) on loans made to a single “European conglomerate,” reportedly the failed Austrian developer Signa Group.

Canadian consumer insolvencies rose significantly in 2023, up 26.2% in Ontario and 23.0% across Canada. The latest Hoyes Michalos 2023 Joe Debtor insolvency data is available here. Doug Hoyes explains the findings below.

What’s distressing to me is the person filing for insolvency is someone with higher income than in the past, says Doug Hoyes, co-founder of Hoyes, Michalos & Associates. Here is a direct video link.

Meanwhile, it’s not just households that are stumbling under record debt weight: Canadian business insolvencies rose 34.7% in the final quarter of 2023, some 51.6% higher than the same quarter in 2022. For the full year 2023, regulatory filings show 4,810 insolvencies, an increase of 41.4% over 2022. Growth at this scale has never been seen in the past 36 years of filing data. See, Canadian Business Insolvencies Surge to Record Growth, Worse Than the Data Shows:

“Businesses have been struggling to cope with a myriad of financial challenges over the past year, including higher input costs, wage costs, and debt servicing costs, exacerbating the rocky footing many have been on ever since the pandemic,” says André Bolduc, the Chair at CAIRP, an industry organization representing insolvency professionals.

Rising insolvency filings don’t reveal the whole picture as national statistics estimate 44,236 businesses closed in October, nearly 5,000 more than opened over the same period:

“Often, we see business owners close up shop and simply walk away rather than taking formal steps to wind the business down or get restructuring advice,” explains Bolduc.

Further explaining, “These business owners are missing out on professional guidance on restructuring and corporate workouts that could preserve the ongoing business operations.”

However, preserving the businesses still leaves the entrepreneurs with a challenging operating environment. Typically, the peak of every housing cycle sees the displacement of consumption towards “inefficient” or “non-productive” allocation, such as rents. If these businesses could mitigate the high debt loads and rising costs, does their customer base still have discretionary spending to consume their products and services?

Property insurance premiums are leaping, and coverage is becoming harder to find in many areas of the world. Few note the significance of these trends and the negative impact on asset prices. Less insurance coverage naturally reduces the amount of net worth owners want in real estate overall and in any location.

Many homeowners in the U.S. are losing their home insurance policies. Major insurers like State Farm and Allstate are no longer offering new policies in California. State Farm attributes this to increased wildfire risk, inflation and other challenges in the region. Louisianan and Floridian homeowners are facing similar issues due to flood risk. Watch the video to learn more about why homeowners are receiving non-renewal notices and what that means for the U.S. real estate market. Here is a direct video link.