US and European banking institutions are increasingly using loan sales as a portfolio management tool and tapping into demand for higher-yielding assets.
Bliss Morris, founder and CEO of First Financial Network, said the Oklahoma City-based loan sale adviser is talking to clients who are uncertain if distress will emerge over the long term. That uncertainty, combined with a short supply of higher-yielding assets, had meant it is an easy decision for banks to sell performing and nonperforming loans.
“It’s truly a seller’s market right now,” Morris told Real Estate Capital USA. “We’re seeing so much activity from the clients that we serve on the sell-side [because] the yields are pretty thin, resulting in aggressive pricing by investors for various types of real estate-backed loans.”
Banks and other loan sellers are selling both impaired and non-impaired assets. David LeBlanc, a managing director at DebtX, said the Boston-based loan sale adviser has found buyers are ready to pay a premium for impaired loans because there are few high-yielding investment opportunities.
“In today’s market, frankly, we’re selling a lot more performing and what I would call stressed, as opposed to distressed [loans],” LeBlanc said. “The [non-performing loan] wave that lots of folks were predicting never really showed up and banks’ balance sheets are in pretty good shape for the most part.”
Morris estimates 85 percent of the sales First Financial Network brokered during the pandemic have been for reperforming loans. Additionally, LeBlanc said sales of impaired loans pricing north of par are indicative of the vast amount of capital chasing yield.
DebtX’s October Market Snapshot said the market for distressed loans has largely consisted of hospitality during the pandemic, but the mix of asset classes has evolved to a more traditional composition of office, multifamily, retail and owner-occupied industrial as the pandemic lengthens.
The firm said sellers of distressed loans, particularly small and mid-sized banks, are finding it easier than ever to access sources of capital from the secondary markets to trim bad debt from their portfolios. Loan sales penned at a price above net book value are becoming more common, the firm said, though they are not the norm just yet.
“There aren’t a lot of NPL sales out there,” LeBlanc said. “But loan sales are increasing because banks are forward-looking and saying ‘Okay, something that would have sold five years ago at $0.60, I could sell it today and $0.95, so we might as well go ahead and make that trade.’”
Just because there hasn’t been distress doesn’t mean there won’t be.
According to Morris, the economic stimulus and temporary measures that bolstered banks and struggling businesses in 2020 and 2021 have begun to lapse and are therefore reshaping the status quo. This means that First Financial Network is eyeing the structured finance world in addition to loan sales from banks for future distressed opportunities.
Huxley Somerville, head of US CMBS for Fitch Rating, believes more evictions are coming but said owners and borrowers are expected to backfill quickly. Foreclosure moratoriums have also lapsed, he said, which means the onus is now on borrowers to fulfill their side of the bargain.
“Back in March of last year when covid hit, one of the first things that we put out as a CMBS group was that we expected a significant increase in delinquencies or default non-payment of mortgages, but it would take a long time for the losses to realise themselves and work through the system,” Somerville said. “We said that the earliest we expected to see any realised losses would be the summer of 2021 and I think we were probably a little optimistic.”
While each state handles mortgage defaults and evictions differently, Somerville estimated it could take a loan up to three or four years to move from delinquency to market sale, depending on the property, borrower and other factors.
An analysis of CMBS loan delinquencies from Fitch Ratings found that as of October 31, 2021, the overall delinquency rate was 2.92 percent, or 23 basis points lower than in September.
Somerville said coronavirus accelerated a trend of delinquencies in student housing loans collateralized by housing in universities with declining enrollments and housing with poor locations. On the other hand, Somerville said office CMBS performance is likely to bifurcate in the coming years.
“We’re going to see, we believe, a deterioration in older office, B and B- quality, that really just can’t compete,” he said. “We believe that many of those buildings will probably need significant monies to be spent on. We’ve already seen it happen in downtown [NYC] after the Great Recession and after 9/11 where a number of older office properties became multifamily condos or rentals.”