by Scott Lynn, Director/Principal
Last week, a commercial real estate columnist profoundly claimed, “we are likely entering the 7th inning in the latest saga of U.S. Bank failures and closings”.
Gee, that’s comforting. Was the author referring to the passage of time or instead, rooting for the potential of a high scoring game?
Surely, most of us would prefer to call it “Game Over” and head for the exits labeled “Banks are Lending Again, Come & Get It”.
The so called “Game” might indeed go on for some time albeit progress is being made. The number of problem banks (those banks having outstanding public regulatory orders) has been reduced from over 1,400 when the Great Recession began to just over 1,000 today. Moreover, the failure rate of problem banks is just over 18%. Just because a bank is saddled with overhanging regulatory order does not mean a failure is imminent. Simply stated, the hole in the Titanic is getting smaller and the sinking is not necessarily inevitable.
Problem or no problem, the banks have moved in a positive direction to clean up their balance sheets. Most banks are adequately reserved. Many banks have already marked asset values to market and the ones that haven’t are being pressured to do so by regulators.
The banks have most certainly increased the pace of moving distressed loans and assets off their books via asset sales. It is estimated that distressed asset sales accounted for almost 20% of the transaction volume during 2010 with the bulk of that volume occurring during the 4th Quarter. Inside the trenches at Metropolitan Capital Advisors (MCA), the pace of distressed transaction volume through June of 2011 has already exceeded our production tally for all of 2010.
In light of the reference to the 7th inning of play, are we closer to the end of the game or are we still somewhere in the middle? The volume of outstanding distressed CRE loans and assets is a good gauge. According to stats from Real Capital Analytics, there remains about $180 billion of bank distressed assets down from a high of $300 billion. It appears we still have 60% of the game to go. That doesn’t sound like 7th inning play especially when another $100 billion of distressed CMBS loans and assets are factored into the disposition equation.
The game won’t go on forever but MCA believes there will continue to be distressed asset opportunities well into 2013. Debt and equity capital is available to facilitate these transactions with leverage, pricing and structure options that vary with the perceived risks. Every capital provider wants to listen to a story about the capital compression of the current ownership as well as the new capital coming into the deal at a favorable basis. Competition for distressed transactions can be fierce. Buyers and sponsors are well advised to have their ducks in a row ready to pounce when opportunities present themselves. Indeed, some opportunities have been or will be good enough to get the crowd screaming for overtime play or hoping the 7th inning will never end.
Want to learn more about this? Feel free to contact Scott Lynn, Director/Principal.