Markets Emerging for Bank Loans, Whether They're Distressed or Triple-A

By Siegel, Howard L. | American Banker, July 14, 1993 | Go to article overview

Markets Emerging for Bank Loans, Whether They're Distressed or Triple-A


Siegel, Howard L., American Banker


In a drastic departure from prior practice, when banks retained and worked out their own Problem loans, more and more have engaged in or are planning bulk sales of problem-loan portfolios to nonbanks. Such efforts have been well received in the marketplace.

A second trend, not yet wide-spread, involves the securitization of commercial loan products. Securitization has been very well accepted and, in fact, is the predominant mode of investment in the residential first-mortgage market.

Efforts are under way to design and introduce to the market the concept of securitization of commercial loans, whereby banks would retain their historical role of origination and servicing but would seek secondary market placement of these securitized commercial loan portfolios.

Wall Street Sees Bargains

Fueling the bulk-sale trend has been Wall Street's tremendous appetite for distressed bank loans, which can be purchased at a discount to book value.

Both institutional investors and special funds that did a number of transactions with the Resolution Trust Corp. appear enthusiastic about continuing to buy troubled loans in the bank market.

Bulk loan sales allow banks to write down troubled assets, take a one-time writeoff against profits, and achieve a balance sheet goal.

In many cases in New England, such writeoffs may have already occurred so that the loan portfolios may be offered to the market at a discount without any negative present balance sheet effect.

And once the investment community perceives that a bank has put its problem loans behind it, the bank's stock price has improved. The bank also is free to pursue its traditional business of making loans and investing in businesses. …

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Markets Emerging for Bank Loans, Whether They're Distressed or Triple-A
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