Twitter: unpaid rent raises bad bank loan – 06/13/2023 – Market

Goldman Sachs was hit by a rise in defaults on commercial real estate loans in the first quarter, fueled in part by Elon Musk’s refusal to pay rent on Twitter.

The value of commercial real estate borrowers (CRE) loans with arrears rose 612% in the first quarter to $840 million, according to reports received by Goldman’s licensed banking entity with to the Fdic (US Federal Deposit Insurance Commission).

This was much more than the increase in non-performing CRE loans reported across the entire US banking sector, which was up 30% over the same period to just over $12 billion, according to Bankregdata. .com, which compiles FDIC reports.

The jump in defaults at Goldman’s deposit-taking business comes as rival banks are warning of mounting losses on commercial real estate loans, most of which were tied to office buildings and made before the pandemic, when the culture of default began. remote work.

Goldman has far less exposure to commercial real estate lending than its larger rivals. At the end of the first quarter, it had $8.4 billion in outstanding loans secured by commercial real estate, according to the FDIC report. Wells Fargo had $91 billion and Bank of America had $60 billion.

However, rising defaults are another sign of the frustrations the bank faces as it tries to diversify its business away from its traditional focus on transactions and trading.

Goldman was among a group of banks, including Citigroup and Deutsche Bank, that loaned $1.7 billion to real estate investment fund Columbia Property against seven office buildings in San Francisco and New York, including two that house large Twitter offices.

Twitter stopped paying rent in November and Elon Musk, the billionaire owner of the social network, has told employees he does not intend to restart payments or cover past due debts, according to lawsuits. Columbia Property, which is suing Twitter over defaults, defaulted on the loan in February. Columbia Property declined to comment. Twitter, which has adopted a policy of not responding to the press, could not be reached for comment.

Given Goldman’s relatively small exposure to the sector, the bad loans will not have a material impact on its earnings. “Loans don’t matter as much to Goldman,” said Christopher Kotowski, a banking analyst at Oppenheimer. Commercial real estate loans make up less than 20% of the bank’s loan portfolio, according to Goldman’s own calculations.

Still, more than 10% of its CRE loans held at its banking subsidiary, which accounts for 90% of total loans, are in some type of delinquency, according to Bankingregdata.com, while the average delinquency at its peers is less than 1%.

In SEC filings and discussions with investors, Goldman defines its CRE loans more broadly and includes credits to investment firms that buy and sell real estate debt, as well as credits used to bundle CRE loans into investment securities.

In this criterion, default is lower, but still higher than that of its peers. “If you look at the totality of our commercial real estate lending activities, our default rate is under 2%,” Goldman said.

The FDIC, however, places these loans, which tend to have much lower default rates, in a different category.

Goldman, which became a regulated bank after the financial crisis, has spent the last decade pumping more money into loans. The company now has nearly $180 billion in bank loans outstanding, up from $3 billion a decade ago.

In 2020, Goldman said corporate lending was a top priority for the company. “We’re taking the bank model,” said then chief financial officer Stephen Scherr during a presentation to investors. “We believe this will be an important source of future growth for the company.”

The bank benefited from higher interest rates, with earnings at its lending entity rising to $3.7 billion in the first quarter – an all-time high and a 20% jump from the same period last year.

However, the larger loan book is also a source of potential losses, given Goldman’s willingness to lend to riskier corporate borrowers compared to its rivals. Just over 65% of its commercial loans are to “junk” borrowers without an investment-grade credit rating, compared with 28% and 17% for JPMorgan Chase and Citi, respectively.

Goldman’s total volume of nonperforming loans, according to FDIC data, jumped to $3.2 billion at the end of the first quarter, or about 2% of its outstanding loans, up from $2.4 billion a year earlier.

Most of them are linked to credit cards and other consumer loans, which make up about 65% of its loan loss provisions, according to Bankregdata.com.

Earlier this year, Goldman signaled its intention to withdraw consumer lending by selling $1 billion in loans linked to its Marcus consumer bank.

David Fanger, who follows Goldman for Moody’s Investors Service, said: “While their risk appetite may be higher than other companies, they are generally more proactive in managing risk.”