Shadow Lenders Hit Hardest By Pandemic Surge on Fed Lifeline

April 9, 2020, 4:45 PM

Some of the hardest-hit parts of the financial world are finally getting a boost after the Federal Reserve expanded its unprecedented support of credit markets to include the debt of riskier borrowers.

Real estate investment trusts that buy private mortgage bonds, business development companies that lend to small or highly leveraged companies and funds that hold some of the riskiest types of complex debt all surged on Thursday.

The central bank, which until today had limited its stimulus efforts to investment-grade corporate debt and only the safest of mortgage-related securities, unleashed its most potent wave of stimulus as it seeks to keep credit flowing while businesses are shut during the pandemic. Wall Street executives including Apollo Global Management Inc.’s Marc Rowan and Colony Capital Inc.’s Tom Barrack had called for the Fed to expand its efforts to support credit.

An index of mortgage REITs soared 12% as of 12:36 p.m. in New York, after slumping 56% this year through Wednesday. An index that tracks BDCs, publicly traded firms that make loans to small and medium-sized businesses, jumped as much as 14% after plunging more than 40% in the past two months.

U.S. REITs, which hold everything from investments in offices and shopping centers to home mortgages, had lost $325 billion in value this year through last week. Among the hardest hit are versions that finance residential and commercial loans.

Many had been forced to sell assets after the value of their investments tumbled. Leverage, used to increase returns when times were good, amplified losses, and firms that operate REITs, including Blackstone Group Inc., TPG Capital and Apollo, were also swept up in the vortex.

Starwood Property Trust Inc., which invests in commercial mortgage debt and is run by billionaire Barry Sternlicht, jumped 17%. Barrack’s Colony Capital surged 27% and Annaly Capital Management Inc. increased 12%.

The Fed’s actions are a win for Barrack, who repeatedly called for the government to intervene in a broader swath of debt markets.

While the Fed’s addition of AAA-rated, non-agency commercial mortgage-backed securities and collateralized loan obligations to the Treasury Asset-Backed Loan Facility falls short everything Barrack called for, “its definitely the correct response at this moment,” he said on Thursday when asked about the measures.

The Structured Finance Association, a trade group that had also been advocating for expanded Fed purchases, cheered the developments Thursday.

“These are incredibly important steps to further support credit flow to households and businesses,” SFA chief executive officer Michael Bright said in a statement. “It is important to remember that this is not 2008, and the market illiquidity can and should be helped by central bank action.”

Shares of Ares Capital Corp., the largest business development company with $14.4 billion in assets, climbed 14%.

BDCs, which make up a $110 billion pocket of the private credit industry, have been battered in recent weeks as the vehicles’ mostly retail investor base unloaded shares amid fears that the coronavirus pandemic would hit small and mid-sized businesses the hardest.

Shares of Eagle Point Credit Co. and Oxford Lane Capital Corp., which invest primarily in the equity of CLOs and lower-rate bonds, also surged. Eagle Point gained 21% while Oxford Lane jumped 15%.

--With assistance from Lisa Lee.

To contact the reporters on this story:
Claire Boston in New York at cboston6@bloomberg.net;
Kelsey Butler in New York at kbutler55@bloomberg.net;
Tom Maloney in New York at tmaloney38@bloomberg.net

To contact the editors responsible for this story:
Nikolaj Gammeltoft at ngammeltoft@bloomberg.net;
Pierre Paulden at ppaulden@bloomberg.net

Shannon D. Harrington

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

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