CRE Asset Managers Take Hits on Credit Suisse Bond Wipeout

Several major CRE asset managers were among the largest holders of Credit Suisse bonds that were written off as part of the Swiss bank’s takeover by UBS Group this week.

Because of the government support for the emergency merger of the two banks, the takeover results in a complete write-down of the bank’s estimated $17B in Additional Tier 1 bonds, known as AT1 bonds, in order to increase core capital, Bloomberg reported.

Among major CRE players, Pacific Investment Management was the largest holder of the Credit Suisse bonds. Newport Beach, CA-based PIMCO holds about $807M of the securities, the report said. The notes are set to fall to zero.

Invesco holds about $370M of Credit Suisse’s AT1 debt, while BlackRock’s exposure is estimated at $113M, the report said. AT1 bonds are a vestige of the European debt crisis, the lowest ranked bank debt.

While the banking crisis appeared to be settling down yesterday—and everyone awaits word today on the Fed’s next move on rate hikes—the chief executive of JPMorgan Asset Management issued a stark warning that commercial real estate forms a critical nexus of risk during the Fed’s aggressive monetary tightening campaign.

“When the Federal Reserve hits the brakes, something goes through the windshield,” George Gatch said at JPMorgan’s European Media Summit on Tuesday. “Commercial real estate is an area of concern. We have higher interest rates for property developers, how does that impact the real estate market and lenders in that space?”

Private market assets are also at risk of shifting lower in price as public markets have already done, he said. “I’m not forecasting doom and gloom but these would be areas I would be concerned about,” he said, according to a report in Financial Times.

Goldman Sachs, in an advisory issued yesterday, said the commercial real estate sector is dealing with a “challenging” environment.

“The recent stress in the banking sector has fueled growing concern about spillover effects on the commercial real estate industry. With over half of the $5.6T of outstanding commercial loans sitting on bank balance sheets, bank lending remains the primary source of funding for the sector. This is particularly the case for small banks which capture the lion’s share of lending,” Goldman’s note said.

Bank of America on Tuesday said investors in its monthly fund manager survey were more bearish on real estate than they have been since October 2020, having taken cautious positions on the asset class since September.

“Concerns over commercial [and] office real estate are driving growing anxiety over the sector,” BOA said, according to the FT report.

A record amount of commercial mortgage expiring this year will test the stability of regional banks in the wake of the collapse of SVB and Signature. According to an analysis from Trepp, smaller banks hold an estimated $2.3T of CRE debt, of which about $270B in loans are due to expire this year.