Pricing Remains Surprisingly Strong

October 2020

September marked the end of a busy quarter. Sales totaled approximately $400MM for 14 clients with an average offering (loan or pool) balance of $7MM. Hospitality and healthcare loans accounted for ~65% of the volume, followed by traditional performing and non-performing small balance loan portfolios at ~15% or $60MM. The remaining sales were predominantly $1MM to $7MM commercial real estate secured loans with some degree of pre-Covid impairment. We expect volume to increase in each of these categories, possibly in Q4, but almost certainly in Q1 2021.

Market Observations

Hospitality assets and loans have gotten the headlines over the past months, both in the broader market and in our Market Snapshots. We’ve been pricing and selling hospitality loans for our bank clients and expect this to continue for the foreseeable future. However, we shouldn’t overlook the increasing sales activity across other sectors and asset classes. We’ve discussed the categories below in recent Snapshots and provide an update below.

Small balance loan and portfolio sales. The definition of “small balance” can vary from lender to lender but for our purposes, think of < $100k to $1M UPB. A number of bank clients have told us that they are seeing these credits transferred to Special Assets at an accelerating pace. This is creating increased staff workloads and inefficiencies by allocating employees resources and bank legal costs on low potential recovery loans. Some clients are choosing to exit these credits via loan sale, reallocating resources to higher recovery loans. We executed small balance portfolio sales for five separate clients this quarter.
Pre-Covid impaired loan and portfolio sales. Eight sales fell into this category for the quarter. These are loans that were stressed and/or in workout prior to the pandemic outbreak in the spring. Most have credit marks, and strong secondary market pricing has allowed multiple bank clients to “clear the decks” of legacy headache credits in anticipation of increased workload in Special Assets. Loan and collateral asset classes run the gamut, including healthcare, retail, multifamily, churches, and restaurants.
- Pricing remains steady, largely at pre-Covid levels. Interest rates are low and investors have held yield requirements down for impaired performing and sub-performing loans. This is a remarkable change from 2008, when yield requirements went from single digits to 20%+ overnight. Secondly, for all the discussion of increasing loan sales, the small balance credit market remains out of balance. There is far more capital than deal flow. Lastly, small balance credit investor portfolios are performing better than expected. Loan payoffs require reinvestment, and healthy portfolio performance generates confidence and optimism when underwriting new deals, leading to more aggressive underwriting and bids. Whether this will continue or is a function of temporary stimulus masking underlying credit deterioration remains to be seen. For now though, banks exiting these portfolios have been pleasantly surprised with the pricing.
- Investor interest and activity remains high. It’s common, perhaps expected now, to see 150-200+ separate investor groups under confidentiality agreement entering the dataroom to review sale marketing and due diligence materials.
- The number of hard and final bids remains elevated, with a wide spread in the range of bidders. The spread narrowed from July to August, and remained steady through September. As we mentioned last month, we think that investors on the low end are either increasing their bids or not participating after having come away empty handed multiple times. The general message remains the same whether you sell loans yourself or use a third party: Go wide across a large audience of investors. Yesterday’s high bidder might not be the same as today’s and 8-9 points on multi-million dollar sales adds up quickly.