With the doom-and-gloom view of bank CRE loans, you might assume that any sell-off of loans would come at a significant discount.
Not necessarily as the Valley National Bank sale of almost $1 billion in CRE loans to Brookfield Asset Management shows. The bank announced it had “closed on the sale of a diverse pool of performing commercial real estate mortgage loans.” The price tag was discounted by about 1% from par value.
But that amount is not even enough of a discount for a company to pay a vendor a little sooner than 30 days. It’s more a courtesy to the buyer. Plus, Valley keeps the servicing responsibilities, so over time chances are they’ll more than make up that trifling discount.
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How can it be so low? It’s hard to believe Brookfield would pay that much if it didn’t have to. As Nathan Stovall, director of financial institutions research at S&P Global Market Intelligence, told GlobeSt.com yesterday, “You’ve had a lot of money raised that banks would purge their portfolios. You’re seeing 5% to 10% of haircuts on overall portfolios and not a lot of those.”
One factor was timing. “Throughout the year we have patiently monitored loan sale opportunities in the context of our deep understanding of the intrinsic value of our assets, and the unique dynamics of the markets that we serve,” said Valley chairman and CEO Ira Robbins in prepared remarks.
The question of timing affects buyers differently. Funds have a lot of investors who want to see a return on their money. The longer the capital sits on the sidelines, the less return the fund develops and the more impatience the investors develop. At a certain point, they will give up on one source of income and find another.
And so, the companies that have been fundraising against the promise of distressed properties have to consider whether they need to start entering deals now and then if they should fish for highly distressed properties or instead treat the undertaking like a Dutch auction, where prices start to come down until one of the participating parties bids and takes the bidding. The dynamic seems apt for current circumstances, and there is only so long a bidder can wait before all the desirable properties are taken.
There is also the beginnings of a potentially new dynamic, where traditional banks originate loans, sell portfolios to private equity to reduce risk and regain capital — like selling off residential mortgages directly to a Fannie Mae or Freddie Mac — regaining capital and possibly still servicing the loan for an extra channel of revenue.
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