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Loans of concern

“Loans of concern” has the same ominous ring as the phrase “persons of interest” when uttered by law enforcement officials investigating a murder.

The corpse in this instance is the commercial real estate market, and Fitch Ratings has the latest indication of its morbid condition.

Fitch reports that it has added 432 commerical real estate loans totaling $5.2 billion to its designation of “Loans of Concern.” The 7 percent increase from June through August, means that $80.7 billion of U.S. commercial real estate loans have either deteriorated or defaulted — that is 17 percent of the total U.S. CMBS portfolio rated by Fitch.

No-one escapes the European Commission

Fitch just delivered some pretty hefty downgrades on subordinated debt sold by Lloyds Banking Group’s insurance arms Clerical Medical and Scottish Widows. 

The rating cuts follow similar downgrades on debt issued by the group’s banking units last week. Once again, the cause for the downgrades is the European Commission’s renewed zeal for banks that have received state aid to share the pain with their investors, notably by deferring coupons on subordinated debt.
The seven and eight notch cuts take the bonds from high investment-grade to low-junk (B+). Not pleasant.

Commercial real estate and small banks

A couple more data points for the commercial real estate and the banks that plowed into the sector during the go-go years earlier this decade. It’s a mess and one that smaller banks and the FDIC will be left to clean up.

Fitch Ratings says banks with less than $20 billion in assets on average have a commercial real estate loan exposure that represents more than 200% of total equity. For comparison, the exposure of the 20 largest banks rated by the firm, is more than 125%. and this doesn’t even include the toxic construction and development loans that are sinking fast.