$44 Million Small Balance Commercial

July 2021
Volume and Loan Mix: The quarter ended on much the same note as Q1 2021, with consistent deal flow and volume approximately flat both by deal count and balance sold. Hotel loan sales remain prevalent, but a lower percentage of overall volume. Other loan and collateral asset classes have increased considerably. Banks are taking advantage of current secondary sale pricing to exit troubled residential loans, dairy and other agriculture loans, small balance commercial and the usual mix of multifamily, retail and special use loans such as churches, restaurants, and challenged healthcare loans.
Shifting Sale Dynamics: While many recent sales were largely strategic, with a focus on portfolio concentrations (hotel and healthcare loans in particular), we’re now finding many banks reviewing at a granular level. Banks are focused on troubled borrower relationships, the time and cost associated with long workouts or simply selling loans because today’s pricing is at or above net book value. This allows the bank to exit headache credits without any additional loss. Bulk sales were common when the FDIC was a massive asset aggregator and seller. But loan sales today, whether individual loans or pools, are tailored to achieve a specific portfolio objective or are targeted at the loan level, rather than just a dumping of credit.
Extreme Bargain Hunters Begin to Exit: Investor interest as measured by NDAs executed remains historically high, but has tapered a bit from our all-time high reached early in 2021. We attribute this primarily due to loan sale pricing. Many bargain hunters that entered the market in 2020 have been largely disappointed. The NPL wave never materialized, and pricing ended up looking more like pre-pandemic than anything close to the deep discounts of 2008-2012. We’ve seen this before and it’s a natural part of the cycle. After all, is there really a need to get that 10th bid if the Investor is 20-25 points low? We think not, it’s best to focus on investors most likely to be competitive in any given loan sale.
Looking Ahead: Forward loan sale predictions are difficult, and most have been wrong since the beginning of the pandemic, thrown for a loop by incredibly accommodative government/regulator/Federal Reserve policy. Excess demand and high pricing is evident in every market, including equities, high yield, residential loans, CMBS, CLO, MBS, etc. Banks are awash with liquidity. Competition for new loans is fierce, from competitor banks to non-bank lenders, many of whom leverage their positions with bank financing.
So, I guess everyone should just pack up and go home, right? After all, lenders have no reason to sell, and investors can’t find anything to buy. Well, not so fast. While the NPL wave predicted by many never materialized, the secondary market picked up substantially in Q3 2020. It has been relatively consistent since then. Market conditions and competition has kept pricing elevated. Most sophisticated banks have a solid handle on the true cost-benefit of a loan sale versus other outcomes. This combination has kept trade rates very high, close to 100% on some deals. We all remember the infamous “bid-ask spread” from the last financial crisis and recall how frustrating it was. Moving forward, we see several reasons to remain optimistic that deal flow will continue.