Credit Conditions for Borrowers About to Get Worse

If financing has been rough in the CRE world so far, get ready because it may get worse. In a recent report, S&P Global Ratings warned that, as of September 19, 2023, when they met to discuss the piece, higher-for-longer interest rates, the potential for a recession, and lingering inflation suggested that “credit conditions for borrowers in North America will likely deteriorate.”

The report, which is dated September 26, 20203, pointed to the risk of an approaching maturity wall for CRE loans and that “losses could rise amid higher financing costs, declining demand, and volatile market conditions for U.S. regional banks.”

“North American corporates’ net outlook bias, indicating potential ratings trends, is at negative 10.1%, the highest since July 2021,” they wrote. “We expect the U.S. trailing-12-month speculative-grade corporate default rate to reach 4.5% by June next year.”

S&P pointed to a good chance of a slip in economic activity because of consumer pull back, an economic concern that GlobeSt.com reported on in the middle of September, as well as the chance that an expected soft landing might be a lot bumpier than some top economists with close ties to the Biden administration had publicly suggested.

“Excess household savings have been largely depleted, student-loan payments restart next month, and there’s been a surge in subprime auto loan and credit card delinquencies, especially among lower-income (and younger) Americans,” S&P wrote. “Together, this sets the stage for a sharper pullback in spending that could lead to a deeper-than-expected slowdown or recession and weigh on revenues and profits in many consumer-reliant sectors at a time when labor and input-cost pressures, while easing somewhat, remain elevated.”

In addition, the Fed remained wary about inflation and had signaled that higher rates could be ongoing, as GlobeSt.com noted on October 4. Top officials calmly had been applying vague Fed-speak in what seems a coordinated effort to manage expectations and support an ongoing acknowledgement that conditions are far from normal.

Debt service or refinancing costs “could be overly burdensome,” S&P wrote, a sentiment many sources have expressed with more certainty to GlobeSt.com. “Borrowers have reduced near-term maturities—trimming speculative-grade corporate debt due in the second half this year and full-year 2024 by 31% and 23%, respectively,” the firm continued.

“However, the share of speculative-grade debt coming due rises in coming years, reaching a peak in 2028. At the same time, North American nonfinancial corporates’ annual cash interest payments rose more than 15% in the second quarter, adding to the first quarter’s 10% jump. It also remains to be seen how long the (pricier) private credit markets will be able to step in to meet borrowers’ rising financing needs.”

S&P is referring to far more than CRE alone, but it all could bear down. Companies seeing challenging credit issues are still likely someone’s tenants. Problems there could turn into rent payment difficulties.