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 Willy 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.
Corrections & Amplifications
This article was corrected March 25, 2020 at 8:03 p.m. to reflect the proper name of Willy Walker. The original version of this article incorrectly spelled his first name as Willie.