Distressed Debt Sales Likely to Soar

By: Tonie Auer, Contributing Correspondent

Like moths to a flame, investors these days are forming around what some believe could be the biggest distressed debt sales market since the days of the U.S. savings and loan crisis, according to a recent Ernst & Young survey.

That’s what Oklahoma City-based loan sale advisor First Financial Network Inc. hopes will happen. The firm plans to sell $150 million in loan participations on behalf of the Federal Deposit Insurance Corporation (FDIC). The sale will include loan participations from four failed banks currently in FDIC Receivership.

First Financial Network will market and manage all facets of the sale to bid on Nov. 3. The performing and non-performing loan participations will be sold on an individual basis. The loans are secured primarily by commercial real estate.

Unlike the 1990s when the formation of the Resolution Trust Corporation (RTC) forced the sale of bad assets and quickly set market-clearing price levels, there are very few deals happening today other than one-off distressed sales, the government’s PPIP initiative has largely fallen on deaf ears, sellers are weighing their options, and a broad spectrum of buyers are simply waiting for the dam to burst and unleash a highly anticipated wave of deals, an Ernst & Young executive stated in the report.

About 47 percent of the respondents to the Ernst & Young survey believe that a significant increase in commercial mortgage defaults will begin before the end of the fourth quarter of this year but slightly more than 30 percent believe the market is already witnessing significant default activity. About one-fifth are looking to 2010 before major default pressure comes to bear on the market and distressed sales begin in earnest, according to the report.

A small majority – 53 percent – of respondents to the survey purchased distressed or nonperforming loans in the last 18 months with 47 percent inactive, according to the survey. Commercial whole loans are overwhelmingly the primary investment of choice for respondents with more than 45 percent eyeing the asset category, Ernst & Young reported. Residential and land loans were the next most popular categories, each selected by 18 percent of the respondents as being a preferable investment, followed by residential acquisition and development (A&D) and construction loans at 11 percent. Commercial and residential mortgage-backed securities (CMBS/RMBS) and loans backed by hotel assets each attracted less than 10 percent of respondents.

One reason why the current distressed market has the potential to play out differently than the RTC model is that Ernst & Young LLP expects a highly competitive market to exist from the outset of this era of distress. About 35 percent of those investors polled claim to have return requirements above 20 percent and an equal number actually are shooting for returns in the 10 to 15 percent range, according to the survey results.

For the Nov. 3 sale, First Financial Network will initiate a marketing campaign aimed at obtaining maximum value on the portfolio. The company will utilize its online Loan Trading Platform to provide financial institutions with immediate access to due diligence information and the opportunity to place bids.