Eye of the Storm or Tempest in a Teapot?

July 2020

Our clients are thinking more about loan sales in this economic environment. We’ve completed ~ $400MM in loan sales since the Covid-19 outbreak and the related shutdown. We continue to gather solid and actionable data to share with clients.

June was busier than we expected but slow by historical terms. Sales were ~$50MM for six clients. Note that June included a couple of non-bank secondary market credit buyers successfully selling back into the market, which gives us some interesting insights that we’ll touch on below.

June Sale Observations

Pricing – On average, pricing is back to pre-Covid 19 levels. Yes, its a small sample size, supply-demand dynamics are clearly stacked in the seller’s favor, and every deal is different, but the results from June spoke loud and clear in this regard.
Participation – Sales remain well attended. Last month we commented that investor registrations have increased, and this is showing up in the numbers. Sales averaged 159 separate investor groups executing confidentiality agreements to review deals, and 15 hard and final bids (due diligence completed) per loan offering.
Trade rate – ~95%. This is a much higher rate than the broader market and very encouraging as neither buyers nor sellers like to spend time and money on no-trades.
A majority of loans sold were Pre-Covid credit impaired. Banks are using the current market strength to reduce exposure in anticipation of an increase in impaired loans moving forward.
On average, investor bid ranges tightened, but not for every deal. This suggests that investors, broadly speaking, are less doomsday focused and those at the low end are tightening up pricing. However, a high bid to cover (2nd place) delta of 7-10 points remains common, so be sure to cast a wide net when marketing your loans.
Individual loan sale offerings while allowing investors to create bespoke pools remains the optimal execution strategy. Retail capital is abundant, and the loan supply – capital demand dynamic currently favors the loan seller.
Secondary market credit “re-sellers” are back. These are buyers that are exiting credits purchased at some point in the past. Their ability to exit credits purchased Pre-Covid at a profit is proof of current market strength. These investors tell us that they want to sell now, essentially front running what they expect to be a large increase in loans hitting the market by year end.

PPP Loan Sales – There is a market. Pricing is a bit below par, and we’re seeing sales primarily to book origination income and eliminate the servicing and forgiveness burden. Some banks are selling non-customer loans and/or small balance only, although loans of all sizes are selling.