It was difficult to generate a headline to best describe the last 30 days in our market. Outside looking in, sale results appear strong, and we have lots of conversations with buyside participants about how well pricing is holding up. While this is all true, there is no doubt that the world and market has changed in several ways in the last six months. A few observations below:
Investor registrations and requests to access our sales platform have increased. Investor participation and number of bids have also increased, not in every sector, but on the whole and in some cases by a lot. Over 200 NDAs executed for a $10MM hotel deal and ~150 for a small bank portfolio gets attention. Seeing 20+ final bids on some transactions should make one feel pretty good, right? Well, yes, but we also can’t help but notice that the bid ranges have increased as well. We are not talking about 3-5 point spreads. We’re talking about very large spreads, evenly distributed throughout a large field of bidders.
You can imagine the discussions when pricing and trading deals. Like with many asset classes these days, there are varying opinions about current and future value, replacement cost, future economic conditions, the impact of economic stimulus, government action and the path of the coronavirus. Discussions with 10 different investors can lead to 10 different outlooks, and lots of differing opinions of value.
So, what is the point here you may ask? Who cares as long as the target price shakes out in the end? The answer is that the target price, or pretty close, is still shaking out at the end but the path to get there is longer with more twists and turns (and anxiety!). If you sold loans yourself in 2017-2019, five calls to the right groups would likely get you there. That’s in the rearview mirror. Today, it’s 20X that number of calls and investors. Everyone has a different opinion of value: Some are backing off all pricing, some pass on certain asset classes and others are foot-on-the-gas looking for opportunities. Cast the net wide, talk to more investors, cover everyone and you’ll maximize your recovery, and ensure that you’re receiving a true market-high bid.
The first month of any quarter is typically short on closings, and long on in market and pipeline discussions. July was no exception. We closed on a few and a couple will bleed into August, so today we’ll focus on a few portfolio management projects and strategies being executed by our bank clients. The hope is that by sharing these strategies we can help others with their portfolio management needs.
- Asset class and sector exposure reduction. We’ve priced well in excess of $1B in high-quality flagged hotel loans for several bank clients. These clients are evaluating strategies to trim overall exposure within a tight, pre-determined budget. The goal is not to sell everything, but to reduce exposure metrics via select selling at pricing that makes sense. We’ve executed similar strategies for other asset classes and sectors – healthcare, indirect auto, non-prime resi, fintech loans, retail, etc.
- Efficiency gains by selling small balance business banking credits. We’re hearing from several clients that small credits are being referred to the special assets group at an accelerating pace. We’ve conducted a couple of sales with favorable outcomes, resulting in further loan sale assignments. The objective is to reduce special assets workload by selling the small loans and allowing account officers to focus on larger relationships. These largely unsecured or under-secured credits typically sell at a large discount, but often at a premium to a true NPV of the recovery of small balance credits when factoring in expenses, headcount and earnings drag.
- Pre-Covid impaired and acquired loans. A majority of $450MM+ of completed sales since the pandemic started have fallen into one of these categories. Pre-Covid impaired sales are a bit obvious. These are the credits unlikely to quickly rebound (long-term healers), and make most sense to exit now, and allow your team to work on accounts that might rebound (short term healers). The acquired credits are a bit of a “tweener,” meaning that they are not horrible, but the pandemic changed the exit strategy. They were deemed exit credits from the start, but pre-Covid, everyone figured that they’d run off, perhaps just get refinanced elsewhere in the normal course of business because the market was so strong. Everyone has a story about that problem credit that the bank down the street took out and you popped the champagne. The pandemic changed the calculus. That exit strategy is gone, and for some clients, a loan sale has proven to be the quick and efficient exit.