Another year ended with a flurry of deal flow and loan sellers maintaining the upper hand. The holidays were quite good to those with loans in the market. We saw pricing increase throughout 2021 with the year’s highest posted in the final month’s bidding. Hospitality loan sales stayed atop the leader board, but urban multifamily, office, retail and healthcare all gained ground throughout the second half of the year. Small balance CRE and C&I volume increased significantly as banks exited time-consuming small balance substandard/watchlist/ workout credits.
It’s safe to say that many loan sales were driven simply by today’s elevated pricing. The supply-demand imbalance fueling these high levels has created an opportunity for many banks to sell loans above net book value. This dynamic was never more clear than in December with average pricing ~6 points in excess of seller reserve prices.
We’ve discussed several trends that emerged among banks throughout the year, most of which continued through Q4.
- Loan sales are no longer for NPLs only as high pricing and record low NPL drive sale volume: Many bank clients shifted focus to selling “shadow inventory” performing yet substandard, criticized, watchlist, and TDR loans not reflected in reported NPL and non-accrual metrics. Economically viable only in a high price/low yield environment.
- CECL in focus: Loans contributing to higher expected loss under CECL guidelines are often first on the block for sale. These so-called “CECL hogs” are often sold above book value resulting in a recovery. We’ve helped numerous bank clients combine loans with expected recoveries with more troubled loans to exit net neutral in a loan sale, while reducing overall substandard UPB.
- Reducing asset class exposure and small balance servicing headaches: Hospitality was the obvious target over the last 18 months, but office, retail, healthcare and small balance CRE/C&I and operating business-oriented credits are closing the gap. Common concerns we hear are around class B-C office in a WFH world, retail (because retail), and the impact of inflation and labor issues with small balance business banking credits and real estate with an operating business component (hotels, restaurants, daycare, etc.).
- M&A as catalyst for loan sales: Strategic pre-merger sales and post-merger housekeeping are a staple for acquisitive institutions. We see this accelerating along with M&A activity.
- Repeat sellers become the norm as banks find loan sales a reliable and repeatable portfolio management tool: This trend is accelerating as 80% of 2021 loan sale volume was from repeat sellers. Loan sales are still new to many banks, but we’re finding that once the first one is cleared, loan sales become a regular part of the portfolio management process. A loan sale isn’t necessarily the best fit for every workout credit, but when it is, access is easy, and liquidity and pricing have never been higher.
(representative photos, actual collateral assets confidential)