DebtX: The Debt Exchange is selling $550 million in performing and non-performing loans for the FDIC and seven financial institutions for a six-week period that began September 20. And while DebtX is promoting the sale as a sign of banks’ improved health, industry experts are skeptical.
The transactions involve mostly non-performing loans from across the country, with some concentration in the Southeast. According to DebtX President and CEO J. Kingsley Greenland II, coverage for the sale has been strong, with interest from local investors and developers, national and international hedge funds and investment banks.
DebtX, a Boston-based global full-service loan sale advisor for commercial, consumer and specialty finance loans, has 10 offerings included in the sale that range from $17 million for a Northeast bank with non-performing loans collateralized by commercial real estate and residential properties in New York to $111.9 million for a bank in the South with performing and non-performing loans collateralized primarily by commercial real estate properties and land in the South and Midwest.
There are also two offerings from the FDIC: a $28.7 million pool of performing and non-performing loans, collateralized by real estate, business assets, stock, vehicles and boats; and a $38 million pool of primarily unsecured performing and non-performing loans.
Greenland says the sale is “an indication that banks’ health is improving” and proof that the number of banks selling has risen since this time a year ago. “They’ve been able to repair, improve their balance sheets and by selling assets they’re putting the problems behind them,” he says. That causes other banks in local markets “to prove they are healthy enough to sell—it’s being compared to your peers; more activity begets more activity.”
Sandy Monaghan, managing director with Cushman & Wakefield Inc.’s capital markets group says banks, in part, are employing this strategy as a way of freeing up capital so they can begin to loan on new deals.
“This series of loan sales is consistent with what we have seen in the market recently and is likely the result of improvement in their balance sheets, coupled with their desire to free up capital to make new loans. In many cases, note sales remain a viable alternative to foreclosure, particularly in judicial foreclosure states where the process can take 24 months or more to complete,” Monaghan says.
Dan Gorczycki, managing director of Savills LLC, an international real estate advisor based in New York, however, says banks are selling smaller loans like the ones DebtX is offering, not because of improving health, but because they want to lighten their workload and give the market a chance to recover before dealing with larger troubled loans.
Gorczycki says DebtX’s offering, instead, indicates both a bifurcated market and a continuing trend by banks to offload underwater loans. For the institutional investor, adds Gorczycki, much of what DebtX is offering is probably undesirable real estate that has been written down to zero or a price below what it will trade for. “With this stuff, you would say it’s a bargain,” he notes. “But it’s a thinner market because most people don’t want the garbage.”
Although Alan Pontius, the San Francisco-based managing director of special assets services at Marcus & Millichap, agrees that DebtX’s current offering doesn’t point to banks’ improving health, he says the outcome of the sale could nonetheless be telling.
“To be blunt, $550 million in loans by a number of sources on the market in the Southeast really isn’t any particular statement,” Pontius says. “On the flip side, how the notes trade relative to prior examples could provide some pretty interesting commentary on market sentiment and direction.”