Sector developments and company hires

FDIC sued over Madden rule
The states of California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina and the District of Columbia last week filed a lawsuit in the US District Court for the Northern District of California against the FDIC over its final rule clarifying that when state-chartered banks sell, assign or transfer a loan, an interest rate that is permissible before the transfer remains permissible following the transfer. In their lawsuit, the states argue that the rule “unlawfully extend[s] federal law in order to preempt state rate caps that would otherwise apply to . . . non-bank entities.” The complaint alleges that the FDIC failed to follow the procedures set forth by Congress for enacting FDIC rules and that the FDIC does not have jurisdiction over the permitted activities of non-banks.

In other news…

Euro CLOs recovered
European CLO spreads have recovered nearly all Covid-19 related widening, according to JPMorgan CLO research analysts.

“We expect some limited compression in Euro CLO triple-A spreads to 130bp (implies around a 20bp premium to pre-Covid levels). European high-grade credit (iBoxx index) is about 125bp currently and CLOs can tighten towards corporates,” they suggest.

The JPMorgan analysts add: “The technical backdrop is supportive, with expected -€30bn negative net supply in European securitised products (excludes CLOs), and we are forecasting €16bn Euro CLO gross supply (€12.7bn year to date).”

Unexpected CMBS defaults highlighted
As of 30 July, 71% of the loans (64% by balance) in Fitch-rated US conduit CMBS from 2011 to 2020 that defaulted in June and July had been expected to default in Fitch's bulk review of the sector completed in May 2020. The remaining 29% (36%), representing 274 loans, were unexpected term defaults.

Within this cohort of unexpected term defaults, the retail segment accounted for 100 loans (37% by number and 42% by balance); hotel, 67 loans (25% and 20%); mixed use, 45 loans (16% and 19%); office, 27 loans (10% and 11%); and multifamily, 20 loans (7% and 5%). Other property types comprised 15 loans, representing 6% by number and 3% by balance.

Many of the unexpected defaults were due to lower NOIs in 2019 compared to 2018, given that the bulk review relied on 2018 NOIs, as it was completed prior to the receipt of the 2019 numbers. As a result, the properties backing the loans that unexpectedly defaulted were weaker at the beginning of the pandemic than their 2018 NOIs indicated.