Citi Could Be Stuck With Troubled Casino Loan as Mortgage Market Seizes Up
March 24 2020 - 8:29AM
Dow Jones News
By Peter Grant and Katherine Sayre
The market for issuing securities backed by commercial mortgages
has frozen up, leaving some of the biggest names on Wall Street
stuck with billions of dollars of loans that are rapidly
deteriorating in value.
This market usually enables lenders to owners of offices, hotels
and other commercial buildings to unload their debt into a
financial market and reduce their exposure. But it has stopped
functioning properly since the novel coronavirus pandemic caused
financial markets to go into a tailspin.
The malfunctioning of the market for commercial mortgage-backed
securities is weighing on recent debt deals. One of the biggest is
the $2 billion loan made in February by a bank group led by
Citigroup Inc. and backed by the MGM Grand and Mandalay Bay resorts
and casinos in Las Vegas. The borrower was a venture of Blackstone
Group Inc.'s nontraded real-estate investment trust and an MGM
spinoff, which purchased the properties just before the loans were
made.
The bank group had been planning to sell most of the debt in the
$500 billion commercial mortgage-backed securities market. But that
debt market has become one of the many victims of the global
financial system's volatility and sharp selloffs.
Property owners rely heavily on the ability to borrow money. But
if financial institutions can't sell commercial mortgage securities
to investors, they are going to stop making new loans to
landlords.
Already, the volume of new loans and demand for commercial
mortgage securities in the secondary market have fallen sharply.
The spread between the most highly rated securities and Treasury
bonds widened to 3.29 percentage points late last week, from 0.86
percentage point at the end of January. That was the widest level
since the 2008 global financial crisis, according to Trepp LLC.
The upshot is that new issues can't be sold without the
underwriters taking unacceptable losses. The only exception are
pools of apartment-building loans by mortgage-finance giants Fannie
Mae and Freddie Mac.
The sale of new securities backed by other types of commercial
property "ground to a halt" last week, said Dave Bragg, managing
director of Green Street Advisors, a real-estate research firm.
Representatives for Citigroup and other members of the bank
group, which includes Barclays PLC, Deutsche Bank AG and Société
Générale SA, declined to comment or didn't respond to requests for
comment.
The shutdown of the new-issuance market is one of the many
cracks appearing in the commercial real-estate world. Owners with
properties that have gone dark during the nationwide economic
shutdown, such as hotels and malls, are almost completely cut off
from debt, market participants say.
Loans "that looked great two weeks ago don't look great today,"
said Willie Walker, chief executive of Bethesda, Md.-based
real-estate finance firm Walker & Dunlop Inc. "They all just
evaporated."
The loan backed by the MGM Grand and Mandalay Bay is especially
vulnerable because Las Vegas has been hit hard by the rapid
deterioration in tourism because of the pandemic. The Blackstone
venture that borrowed the money is counting on annual rent starting
at $292 million from MGM Resorts International, the owner of the
casino resorts occupying the real estate.
But MGM Resorts, along with nearly every commercial and tribal
casino in the U.S., has closed, affecting about 642,000 workers in
the U.S. and billions of dollars in revenue.
Earlier this month, Moody's Investors Service gave the loan a
tentative investment-grade rating. That so-called presale report
noted that the first confirmed Covid-19 case in the U.S. was
reported in January. "The outbreak is in the early stages and its
full impact is not possible to predict," the report stated.
But the report based its preliminary rating on the corporate
guarantee that MGM Resorts made to back up the deal. That support
looks much shakier with the collapse in the travel and leisure
business. MGM shares plunged by 72% from a high of $33.66 on Feb.
12 to $9.15 on Monday. The company had $11.3 billion in debt and
$2.3 billion in cash at the end of 2019, the company said.
A spokeswoman for MGM Resorts declined to comment.
(END) Dow Jones Newswires
March 24, 2020 08:14 ET (12:14 GMT)
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