We entered May 2020 cautiously optimistic, albeit with a fair amount of trepidation. We had closed ~$200MM in loan sales for 15 banks since the Covid-19 shutdown, and were well beyond the panic public market credit selling of late March and early April. Further, secondary market credit investor portfolios held up better than expected, giving them staying power, and confidence to continue to bid and purchase bank loans and portfolios.
However, we remained mid-shutdown in many parts of the country, with looming uncertainty as to the economic impact on businesses, consumers and asset values. Loan pricing meetings turned into long virtual discussions around “what-ifs” and variables that would have been unthinkable 90 days ago.
So here we are, June already, and with another $150MM in loan sales closed, we can share the following observations:
- Bank loans and portfolio sales remain well attended, with a slight increase in number of bids received, but a larger variance between bidders. From this, we draw a couple of conclusions
- Investor outlook can vary widely, optimistic, pessimistic, somewhere in the middle. Its important to cast a wide net. Yesterday’s best buyer might have a very different outlook today.
- New capital is entering the secondary market. This is net positive, but invariably, some will be extreme bargain hunting, searching for unrealistic pricing. This will revert quickly. New capital will adapt to the competitive environment or exit the space. We saw this in 2008-2009.
- Pricing fade from the pre-Covid 19 environment remains loan, collateral and location dependent, ranging from zero to 10-12 points. With April sales, we witnessed additional variables,
- Many loans with discounts reflective of existing, pre-Covid credit impairment received little to zero additional haircut . Cash flowing loans (high touch servicing, sporadic paying, but not true “performing”) traded at the low end of the pre-Covid indicative pricing, suggesting that while investors are not being overly optimistic about a high degree of credit improvement, they are not penalizing these credits for the current environment.
- Individual offerings and careful pooling of micro credits improves execution. The large portfolio buyers have yet to step in aggressively and in size, and investor appetite varies, investor by investor, credit by credit. Work with your team to identify a target audience for each credit in order to maximize price.