DEBT BOMBS AND PRICE CUTTERS


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The owner of Miami’s 66-year-old Fountainbleu Hotel, an icon of glamour for much of its time, is asking lenders to suspend interest payments on the hotel’s $975 million in bonded debt because of “cash flow problems” since the hotel closed during the economic shutdown.
The bonds, sold last November by Goldman Sachs, carry a $4.3-million monthly payment predicated on a 75-percent occupancy rate for the hotel and a steady flow of customers through its dozen bars and restaurants, where trademark dinners can cost almost $200.
The bond sale was based on the hotel’s valuation of $1.66 billion. The hotel’s market value is now $1 billion, according to the CRED iQ real estate analysis firm, meaning the hotel is worth about as much as it owes.
CRED iQ’s figure assumes the hotel’s occupancy rate will not reach 80 percent until 2025.
However, CBRE, the national realty firm, expects hotel occupancy in general to return to 2019 levels by 2023, potentially buoying the Fountainbleu’s worth.
The hotel is reopening and foresees a “hockey-stick” shaped return to solvency based on initial reservations, a company executive said.
The Fountainbleu’s debt was packaged into an investment vehicle called single-asset, single-borrower bonds, or SASBs. The bonds are issued by marquee properties seen as carrying low risk. In 2019, these instruments made up about 40 percent of the commercial mortgage market’s $120 billion in bonds not backed by governments, according to analysis firm Trepp.
That proportion is almost double the 21 percent of the market the vehicles took up in 2012.
Now the SASB market has slammed to a halt, leaving debtors and investors to negotiate their way out.
The value of SASBs now in arrears or being renegotiated was $7.8 billion as of 30 April, up from $681.6 million in February, according to Morgan Stanley, a more than tenfold increase.
Retailers Slash Clothing Prices
Macy’s, Ralph Lauren, TJ Maxx, and other clothing lines and stores are writing down the value of their on-hand merchandise by hundreds of millions of dollars.
Macy’s is writing down the value of its goods by $300 million, Ralph Lauren is taking a $160-million “inventory charge,” TJ Maxx wrote off $500 million, and Ross Stores took a $313-million write-down on its inventory and expects to sell much of it below cost.
Much spring clothing has been sitting on shelves in stores and warehouses since the economic shutdown began more than two months ago and is now outdated.
Gap has discounted much of its clothing by 50 percent, Levi’s by up to 50 percent, and American Eagle apparel has been marked down to 40 percent of its original prices.
TRENDPOST: As we’ve said since the economic shutdown began, mass unemployment will lead to falling prices in a deflationary cycle. If you have money and a job, 2020 will be a great time to buy everything from jeans to appliances at bargain prices.

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