Like ships taking on water, banks are throwing assets overboard trying to stay afloat. PacWest sold $3.5 billion in lender finance loans to private lender Ares last week. The Financial Times reports, “Ares paid $2.01bn in cash for the first tranche, less than its principal balance of $2.07bn. PacWest had previously raised $2.36bn by selling construction loans to real estate investors Kennedy Wilson.”
“There are currently a lot of portfolios changing hands. It’s not just PacWest,” said Joel Holsinger, co-head of alternative credit at Ares. “This is the first inning. They [banks] are selling the assets that are their highest-quality assets and that are short-duration and floating rate.” Some quick math on the $2 billion sale looks to be a 3% hit to PacWest on their best loans.
Holsinger continued more soberly, “The next wave will likely involve the bid-ask spread coming down and will likely include non-core bank assets. Banks are asking themselves: what do I have that I am not going to be in, longer term, when I streamline my business?”
Remember, banks on their best day don’t have much capital, so selling loans even at slight losses can’t continue. But with deposits leaving and bank share prices cratering, even performing loans are being sold in bulk at a discount. The FT’s Brooke Masters writes, “The trend is particularly pronounced in the real estate sector, where a large number of banks including HSBC’s US arm are considering discounted offers for their portfolios even when borrowers have not fallen behind in making payments. The volume of real estate loan sales ran four to five times ahead of preceding years in the first four months of 2023, according to LightBox RCM, a global market for such loans.”
Ari Rastegar, who heads an eponymous real estate investment group, told the FT, “We will continue to see loan portfolios transact, potentially more so than at any other time since 2008. This is a systemic move by banks to gain liquidity and de-risk.”
Even Goldman Sach took a $470 million loss selling loans in the first quarter.
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