DebtX Team Market Snapshots April 20, 2021

Loan Sales Ramp Up, and it’s not Just Hotels

April 2021

Traditional Loan Sale Offerings Accelerate. We’ve spent considerable time reporting on hotel loan sales recently, and with good reason. DebtX closed over $550 million in hotel loans over the past three quarters, making us a clear leader in the small balance and middle-market arena. Two recent DXInsight pieces we’ve published (available here and here) regarding hotel loan sales provide greater detail. But in addition to closing another $100 million in hotel loans in Q1’21, traditional loan sale activity has increased considerably. Closings include mixed collateral (CRE & C&I), small business banking pools, office, multifamily, mixed-use, church and healthcare loans, along with collection and litigation-intensive loans.

Investor activity has remained off the charts, and prices have been strong. If you’re a lender with some unloved loans (pick any reason why), a sale at or above book value is a distinct possibility. Loan sales continue to be a terrific opportunity for active portfolio management and all of the associated benefits – managing credit metrics and account officer workload, limiting legal expenses, improving risk management, and overall diversification, among others.

Key Takeaways From A Year of COVID. Q1 ’21 represented the fourth and possibly final quarter of COVID, at least in the U.S. With the benefit of hindsight, here are three key takeaways from the past year:

  1. Liquidity Flooded The Marketplace. It seemed like many investors spent the first few weeks of the pandemic banging out PowerPoint decks promoting the idea of an impending credit market collapse. Their pitches were compelling, and we saw investor activity (a rough liquidity proxy) jump in Q3 ’20 for deals of all types.  Some investors were new to the market, and others were old friends.  But for the most part, unlike in CRE equity markets, loan buyers were not tire-kickers doing price discovery.  Sure, a handful of new buyers and some re-entering from the sidelines were looking for high, above-market returns, but they were quickly disappointed.  Investor yields tightened, instead of loosened. Prices for distressed assets climbed in the face of looming credit distress.
  2. NPL Volume Did Not Explode.  NPLs, on the other hand, stayed near historic low levels. The surprising lack of NPL sales exacerbated the supply-demand imbalance in the secondary market.  Stimulus packages kept many businesses liquid, and banks found a benevolent regulatory environment that encouraged cooperation with borrowers.   Routine credit extensions with no adverse regulatory consequences – unheard of in prior financial crises – created a safe harbor for distressed loans. This observation is not meant to minimize the devastating financial and social toll of the pandemic. Rather, this crisis did not trigger a financial panic that flooded the NPL market with product. However, the clock is likely ticking for weakened office, retail and healthcare loans. It will be interesting to see what transpires after the stimulus payments wash through the system.
  3. Strategy Drove COVID-Era Loan Sales, Not Desperation. While there was a paucity of NPLs, our COVID-era loan sale volume over the past year was substantially higher than the preceding year. We found that the most effective sellers are strategic, forward-thinking institutions, both pre-pandemic and during COVID.  In all cases, sellers were looking to rebalance a loan portfolio based on changing market conditions, not dumping bad loans.  They were optimizing their balance sheets on a risk-adjusted basis to move their institutions forward. Looking ahead, we expect a continuation of strategic loan sales.

Representative Transactions

$22 Million (Finance Company) Church

Asset Class:
Various
Location:
Nationwide
Sale Structure:
Individual & Pool Offerings
Status:
In Market
Seller:
Fund

$39 Million (Bank) Boutique Hotel

Asset Class:
Hospitality
Location:
NYC
Sale Structure:
Individual Offering
Status:
In Market
Seller:
Bank

$72 Million (Bank)

Asset Class:
Various
Location:
Northeast
Sale Structure:
Individual & Pool Offerings
Status:
Sold
Seller:
Bank

$94 Million (Bank)

Asset Class:
Hospitality
Location:
Nationwide
Sale Structure:
Individual loan offerings
Status:
Sold
Seller:
Bank

$10.5 Million (Bank)

Asset Class:
CRE & Resi
Location:
Mid-Atlantic
Sale Structure:
3 Pool Offerings
Status:
Sold
Seller:
Bank

$4.5 Million (Bank)

Asset Class:
Small Balance Commercial
Location:
Southeast
Sale Structure:
Individual Offering
Status:
Sold
Seller:
Bank

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