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The US commercial real estate market continues to struggle but Wall Street is already betting on a resurgence of the commercial mortgage-backed securities market.
US commercial real estate prices declined by 4 percent in June after two months of price increases and are still 41.4 percent below the peak recorded in October 2007, according to data from Moody's Investors Service. Delinquencies on loans in CMBS also continued to rise in July, though at a slower pace, according to Fitch Ratings.
The Dodd-Frank financial reform is allowing banks to redeem trust preferred securities at face value for 90 days. So far, large banks haven't used the redemption provision and they may not take the opportunity at all.
The new law is offering this option as trust preferred securities, also called Trups, will no longer qualify as Tier 1 capital. The exclusion will begin in 2013.
Large US banks have reduced hard-to-value Level 3 assets since the beginning of the year, according to quarterly filings, but it doesn't mean their balance sheets are in better shape.
The decline was modest for some banks, especially compared with the sharp improvement in 2009 when banks raised equity and reduced leverage. In addition, the recent requirements to consolidate off-balance sheet vehicles helped remove some assets from the Level 3 bucket--but only to reclassify them under different categories on balance sheets.
Wal-Mart Stores may be moving its apparel-buying operations back to the company's headquarters in Bentonville, Arkansas, only a year and a half after consolidating them to New York, according to a source who wished to remain anonymous.
The decision to move to New York, announced in February 2009, was a painful one for employees. Some 700 to 800 workers at Wal-Mart's corporate headquarters were terminated as a result and the decision to move back may produce more casualties in New York this time.
Corporate borrowers will likely continue to enjoy record low interest rates in the next few months as the Federal Reserve keeps selling Treasuries and the outstanding level of corporate bonds goes down.
Obviously, that's if the US economy avoids a double-dip recession.
A recent court decision involving JPMorgan and Mexican cable operator Empresas Cablevision sent another blow to the securitization market, and especially to collateralized loan obligations (CLOs), but gave more of a say to borrowers when lenders want to pass on their loans to others. It could have a broad-reaching impact on structured financings.
At the end of July, the US District Court for the Southern District of New York invalidated a participation granted by JPMorgan to another bank in a loan from JPMorgan to Cablevision. The terms of the loan allowed participations, but the court recharacterized the participation as an assignment-which required the borrower's consent.
As part of the financial overhaul, federal banking agencies have jumpstarted the process of finding alternatives to using credit ratings for calculating banks' capital levels. But alternatives are few and far between and some could be expensive too.
The various bank agencies - the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision - are seeking to gather information and comments on alternatives and on a set of criteria considered important to evaluate creditworthiness standards such as risk sensitivity, transparency, consistency and simplicity.
Private equity firm KKR's withdrawn stock offering is sending yet another negative signal regarding the current state of capital markets.
KKR moved its shares to the New York Stock Exchange last month and was planning to raise $500 million in additional stock but canceled its plan Monday citing unfavorable market conditions. KKR did so despite the S&P 500 being up 5 percent in the last month. KKR shares have lost 6 percent since they started floating on July 15 and further declines could be in store.
If the Federal Reserve Bank of New York requires mortgage originators to repurchase mortgages acquired through the bailouts of companies like American International Group and Bear Stearns, as it said it might, banks could face weaker earnings and reduced lending capacity as a result.
Second-quarter earnings showed that recovery is on its way for banks, with, for example, Morgan Stanley beating analysts' forecasts. But there's still some pressure on the industry.
Congress is finally working on a bill on covered bonds, hoping to boost investor demand and give banks another route to fund some of their loans. But if passed in its current form, the bill will have some flaws, including insufficient overcollateralization and inconsistent regulatory regimes for different types of issuers.
The House of Representative Financial Services Committee sent the United States Covered Bond Act of 2010 to the floor of the House last week.
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