U.S. banks mitigate commercial real estate scare

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

It has been almost a year since America’s regional, local, even major, banks started bracing themselves for the repayment onslaught of more than $25 billion of past due outstanding commercial real estate loans.

This “bubble” of debt has been growing steadily since the 2008 financial meltdown, recently reaching over 9% of bank-held commercial real estate loans that are 30 days or more overdue. Although the federal government was ready to step in with tailor-made relief programs, the banks have taken it upon themselves by deferring due dates with indefinite extensions, hoping that conditions in the wide-ranging commercial markets — shopping malls, office buildings, condominium towers, institutional structures, etc. — will change for the better in the reasonably foreseeable future.

With the current level of problems almost quadrupling the amount of debt that existed as late as the end of 2007, the repayment capability of most developers has been complicated by overall commercial values that, according to Moody’s Inventors Service, have sunk 42% below the October 2007 peak.
Federal regulators have been supportive of the banking sector’s temporizing the current unsolvable crisis. They have allowed banks to liberally restructure loans and allowed them to be classified as “performing,” even if the underlying property has fallen below the loan amount — an ominous warning against ultimate repayment.

Banks hold some $176 billion of souring commercial real estate loans. About two-thirds of bank commercial real estate maturing between now and 2014 are underwater, as the loans in most cases are larger than today’s estimated value of the underlying property. This could eventually mean major write-offs, no matter how long the payments are stretched out. Since the relevant banks have not been setting aside sufficient cash to offset the massive losses that will eventually emerge, a hit to these institutions’ earnings would muddy up already stressed-out balance sheets.

Even if marginal survival could be accomplished by the hardest hit banks, they most likely would have to seek safe havens in mergers or sellouts. The crowding out of additional loans required by future projects would make such requests harder to fulfill and available only at a substantially higher rate of interest.
For now, the best that can be expected is an alleviation of a financial catastrophe that could reignite the potential financial meltdown that instigated the late 2008 outbreak of the subsequent “Great Recession.”

Aalberts Industries emerges as a potentially dominant PVF sector force

With the surprise acquisition of Conbraco, heretofore relatively unknown Dutch multi-national Aalberts Industries is emerging as a potential new powerhouse in the U.S. pipe-valve-fittings firmament.
This U.S. participation is neither innovative nor even of recent vintage; for more than a decade, wholly owned subsidiaries Elkhart Brass and Lasco plastic fittings and affiliated products have provided Aalberts a solid base of operation in the American market. However, these companies, which are reportedly doing well as independent manufacturers and marketers, could become part of an overall juggernaut that would catapult the new combo to the top of the heap in the commercial, residential and light industrial markets.

Even these formidable acquisitions are dwarfed by the purchase of Conbraco, one of the PVF industry’s largest privately-owned manufacturing companies, with sales in excess of $200 million in annual revenues. Thirty-five year old, fast growing Dutch flow control conglomerate Aalberts is now positioned to solidify its brand names and to take its place as a broad-spectrum valve and fitting force. It could join in the leadership of the U.S. manufacturing-marketing scene in that sector of pipe-valve-fittings where ball valve giant Conbraco predominates.

With Conbraco’s massive contractor and industrial ball valve market penetration, a coordination with Aalbert’s valve and fittings units should give Aalberts Industries a potential growth position, establishing the Dutch-based corporation as a major factor to be reckoned with. Conversely, Aalberts will provide the conduit to open new markets for Conbraco in Europe, where Aalberts’ holdings are firmly established. It will be interesting to see what steps founder Jan Aalberts will take to capitalize on the combination of U.S. based PVF assets he has acquired.

With corporate sales of more than $1.5 billion in 2009, as listed on the Amsterdam Stock Exchange, it would seem a certainty that Aalberts Industries will be on the prowl for additional U.S. acquisitions, synergistic with its present product line development. The emergence of this new, primarily family-owned valve and fittings behemoth would certainly create a new power balance in America’s PVF sector’s infrastructure.

Natural gas usage predicted to double in forthcoming years

A report released on Friday, June 25, by the Massachusetts Institute of Technology stated that, in the next 20 years, natural gas will double its share of the American energy market, from today’s 20% to 40%. Much of this expansion will come at the expense of coal usage, which is not expected to attain the role of a "clean" energy source, as a powering element for America’s expanding power generation.
The use of natural gas as a substitute for gasoline still seems far-fetched at this stage, although it is increasingly used in government vehicles — trucks and buses that can be resupplied at large central locations.

Although billionaire entrepreneur T. Boone Pickens has already invested both his money and reputation in the future of natural gas, it’s still questionable whether that aspect of natural gas growth is viable. With the breakthrough of “fracking” shale, which has the capability of releasing untold billions of cubic feet of natural gas, supply appears to have been resolved for many years to come.

Natural gas usage generates only one half the amount of CO² and greenhouse gases released by coal, but this may not satisfy the Environmental Protection Agency extremists, who believe that even this diminished amount is too excessive. It seems that the EPA is putting its bets on wind, solar and geothermal energy, even though global experts predict that the long-term energy outlook still indicates that 80% of world energy usage 50 years from now will depend on oil and natural gas.

Even the realization of these facts would not be enough to convince the EPA to change its stance. Its belief system calls for clean air mandates, even if this results in the rationing of power for electrical generation and the limitation of automobile and truck usage on American highways. As long as the current cadre of Environmental Protection Agency members are empowered by the White

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