Loancore Capital Markets LLC Outlook Revised To Negative On Economic Impact From COVID-19; 'B+' Rating Affirmed

  • We expect the economic impact of COVID-19 to lead to deterioration in prices or confidence in commercial real estate (CRE) and commercial mortgage-backed securities (CMBS), which could result in loan losses, margin calls on repurchase facilities, as well as stress on earnings for CRE lenders.
  • We are revising our outlook on the company to negative from stable. At the same time, we are affirming our 'B+' issuer credit rating on the company.
  • The negative outlook reflects our view that the company may experience a deterioration in asset values in the current difficult operating environment, leading to margin calls on its secured repurchase agreements.
NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings said today it revised its outlook on Loancore Capital Markets LLC (LCM) to negative from stable. At the same time, we affirmed our 'B+' issuer credit rating on LCM.
The fallout from COVID-19 has increased the risk that LCM experiences losses and receives margin calls on its securities and loan portfolio investments. The company depends on its secured repurchase facilities, which are backed by mortgage loans, participation interests, and CMBS, to finance the origination and purchase of CRE loans for securitization. LCM's draws on these facilities fluctuate around the timing of originations and securitizations; as of Aug. 31, 2019, the company had $430 million of borrowings under the facilities, but, as of Nov. 30, 2019, the amount drawn was $152 million as a result of a securitization that LCM completed in late 2019. The company also ended November 2019 with approximately $51 million of approved and undrawn capacity on its repurchase agreements.
We believe that increased spreads on CMBS facilities could lead to margin calls in the short term, while the potential credit deterioration in LCM's loan portfolio could also result in margin calls. The company is focused on originating and purchasing office, multifamily, retail, industrial, and hospitality mortgage loans in metropolitan areas mostly on the east and west coasts of the U.S., and the company held approximately $489 million of loans for sale as of Nov. 30, 2019. We believe the value of these assets could deteriorate in the current uncertain environment. Favorably, LCM has shifted away from higher-risk transitional loans since 2017, which reduces credit risk.
The negative outlook reflects our view that, over the next 12 months, the current difficult operating environment may result in deterioration in prices or confidence in CRE markets that could lead to loan losses, margin calls on repurchase facilities, and stress on earnings. We expect leverage to fluctuate according to the timing of originations and securitizations but to remain below 4.5x. We expect the company will address the June 2020 maturity of its $300 million senior unsecured notes by May 2020.
We could lower the ratings over the next six to 12 months if:
  • Declining CRE property valuations and weakening loan performance strain liquidity,
  • LCM increases leverage materially, or
  • The company suffers material losses or profitability issues, or asset quality deteriorates.
We could revise the outlook to stable over the next six to 12 months if the macroeconomic environment improves, the company's liquidity remains adequate, in our view, asset quality is relatively stable, and leverage remains within our expectations.
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