Heavy Volume Met With High Demand

September 2020

August was an extraordinarily busy month. Loan pricing volume exploded, and we bid $185MM throughout the month. Eight separate clients were represented in these sales and 38 of 42 sale offerings closed, resulting in a trade rate of 90.5%. This is a fantastic number well above the market rate. We expect increasing volatility in this area, especially with such a heavy slate of hospitality on the calendar. As we’ve noted in previous Snapshots, we’re executing exposure reduction strategies, where the objective is to selectively trim exposure within a pre-defined budget.

Key Highlights

Although busy, the market has remained relatively stable. The month was notable for the continuation of existing trends rather than big positive or negative surprises. Trends discussed in prior snapshots include:

Very strong investor interest and activity. 100-200 investor NDAs is common for any given deal. Exceptions have been at the high end; a large hotel portfolio saw a whopping 289 investor ND As!
Investor registrations continue at a rapid pace. We are constantly augmenting our large buy-side database with advertising and direct calling and these efforts are bearing fruit. For example, our large volume of hospitality and healthcare loan sale offerings has attracted interest from sector specialists, including finance companies, private equity, and owner operators. Similarly, our large volume of NYC offerings has resulted in a spike in registrations from the NYC metro area.
The number of bids per deal remains high. We are seeing a large spread throughout the field of bidders, but the spread is narrowing. We’ll continue to watch this over the coming months. Based on August bids, I suspect that investors at the low end of the range are listening to the Traders and either increasing their numbers, or not bidding. This is a healthy sign. Everyone likes to see strong participation, but we don’t want to waste anyone’s time. It’s pointless to bid if you’re 20 points off the market.
Hospitality sector exposure reduction. We’ve been in market with ~ $300MM and collected lots of data. While the primary origination market remains “no bid,” the secondary market is quite active. So, why and how is this possible? One way to think of it is that the primary market is like a light switch. Most banks and CMBS lenders are not lending on hotels, so the switch is off. On the other hand, the secondary market is like a dimmer switch. Nobody is buying at par, but what about 95%, 90%, 85%? At some price/yield point, the liquidity flows in, and this is exactly what we are experiencing. So, you might not love the price, nobody likes to sell loans below par, but you will find liquidity. Further, with access to hundreds of investors, you can be assured that you are receiving a true market price rather than being backed into a corner by one opportunistic investor.
Small balance credits. We mentioned last month that numerous clients are seeing increasing referrals into special assets. These small credits consume a disproportionate amount of resources relative to their potential recovery dollars and several clients decided to exit in order to free up resources. We’ve done a series of sales and share some observations with the last sale below:

Pricing smashed expectations, exceeded the reserve price by 25%! We attribute this in part to continuing demand-supply imbalance in the small balance commercial credit secondary market.
Strong investor interest. 167 investor NDA’s executed to view the portfolio, and 12 final bids. Note that a final bid is just that, final, due diligence completed with no contingencies.
Strong bids across the field. This was perhaps the most encouraging statistic. A majority exceeded reserve and any one of the top five would have been deemed an eye-popping number.