Given returning liquidity in the certain sectors of the real estate lending markets, some may have predicted that the run of loan sales would be slowing? Henderson Global Investors’ Colin Throssell explains why the opposite is happening
Earlier this year, following PWCs forecast of circa €15bn of European loan sales in 2013, the run rate to end June highlighted “only” circa €5.8bn of sales; slightly less than the €7.6bn sold in the first half of 2012. A slowdown was, statistically at least, true.
As always: “Lies, damn lies and statistics”.
Traditional lenders may have renewed appetite for relatively prime new financing on market terms, but there remains a general need to deleverage following the pre-2008 property lending glut.
Whilst a large portion of such deleveraging will stem from the natural run-off of loan books – as loans repay at maturity or as investors sell assets early – loan sales will remain a key way of accelerating this process for some time yet.
It ought to be no surprise, then, that Eurohypo’s recently announced €5bn UK loan book sale in July bought the year-to-date total racing up to €11.2bn and that Cushman & Wakefield have recently predicted total transaction volumes for Loan Sales will reach in excess of €30bn by the end of 2013.
Contrary to the statistical impression of H1 2013, it seems that the market for loan sales is not diminishing at all, but rather broadening its focus in terms of both the jurisdictions involved, the potential purchasers and those who will consider the concept of a loan sale.
Jurisdictionally, to date, the UK, Ireland, Germany and Spain have attracted the majority of transactions, accounting for almost 90% of sales.
There is persistent noise, however, over the growing intent to repeat this approach in the Netherlands, Italy, Finland and France going forwards – markets which have so far seen very little activity to date and which provide a large new area of opportunity.
Equally the range of potential seller and buyers is also becoming diversified.
Loan sales are now something more strategic than simply a “mass sale of distressed positions” and similarly loan portfolio purchases are no longer the preserve of bullish private equity houses or opportunity funds whose strategies largely revolved around loan to own or focus on narrowing of weighted average discounts by further breaking down portfolios for onward sale.
More traditional lenders are considering loan sales at small discounts for relatively prime portfolio’s in order to deliver accelerated deleveraging that has been promised to Shareholders.
Similarly, traditional, better capitalized lenders are entering the market as purchasers with strategies around buying-and-holding to deploy balance sheet and create long term revenue streams or partial securitisation (seeking to profit from the spread between CMBS pricing and the weighted average margin of the loan pool itself) or some combination of the two.
The result of this “mainstreaming” of the concept of loan sales suggest the market will continue to gather momentum with a growing number of potential purchasers narrowing discounts on purchase itself attracting more potential sellers… and so on.
So for the foreseeable future there is still a wealth of opportunities to access the market via loan sales.
The opportunities seem best for well-capitalised, under-lent banks, insurance companies and new debt funds that have fire power to deploy and wish to take a short cut in establishing themselves as a scaled, credible market player with a network of relationships.
Indeed, the Wells Fargo’s purchase of the Eurohypo loan book – and with it the lending platform – is a case in point.
It is perhaps predictable, given the success of that particular transaction, that Deutsche Postbank’s UK loan book sale suddenly looks well advanced with several parties circling the potential purchase; it feels that this is a model that could be oft repeated.
Colin Throssell is Head of Treasury at Henderson Global Investors