Investment Company
Portfolio Loan buyouts are not much different than any other business buyout, where you carefully analyze each deal and make an offer based upon the perceived upside opportunity balanced against the risk. Sometimes it is a one-off buyout and sometimes it is a whole portfolio. Other times it may be part of a portfolio. One thing different when it is a portfolio of loans is being able to average between them to mitigate risk. Also, taking some of the really bad loans with the not so good ones usually allows for negotiating a better deal. In most cases what is a real bad loan for a lender is the type of opportunity we are looking for, as it presents the most upside opportunity.
Our ability to capitalize on any of these opportunities is based on the fact we are not a bank mired down with regulations and regulators. This allows our team’s extensive experience, education, technology, creativity and flexibility to approach things with the mindset of commonsense solutions to a business situation. Additionally, we can act where a bank cannot or will not. We also have the expertise and experience to analyze and negotiate the best terms.
Loan buyouts can be anywhere from par down to 60-90 cents on the dollar. Not only do we pick up the spread of the principal amount owed on these write-downs, but we also increase our interest return on the loan where the customer is still paying on the loan or can be restructured to start paying. For example, on a $1,000,000 loan where the borrower is paying 8% interest and we buy it out at 90%, we are then making an 8.88 % return. With an 80% purchase price, the return would be 10%. 70% would be 11.42%. 60% would be 13.33%. 50% would be 16%.
The first step in successfully negotiating with any lender to buy out a loan or loan portfolio is proof of funds. Typically, this is a letter from the funding source, and not necessarily a bank statement. An NDA is signed with customer privacy rights protected. Then a spread sheet outlining the loan or loans is provided. If the buyer is interested in pursuing, an in-bank audit is then set up, although recently the bank now simply uploads all the documents to a secured cloud drop box portal for the loan review team to analyze.
Banks have to classify loans in one of four classes based on the restrictions of their regulators. Just because they classify a loan does not necessarily mean it is a bad loan. The write-down may be based on some technicality or ratio that was not met. 99% of the calls we receive involve a bank situation. Of those inquiries, at least 1/3 or more are bank induced problems, and not a problem with the borrower. Another 1/3 are borrower problems, and the last 1/3 are a combination of both. Normally bank induced problems are an easy fix of just restructuring the loan.
For easy math let’s use a hypothetical portfolio of a 10 Million Dollar classified loan portfolio that has 10 loans, with each one being in the principal amount of One Million Dollars. Let’s say that 5 are class A loans, 3 are class B loans, and 2 are class C loans. Class A loans have the least of problems and the Class C loans are the worst. We would analyze and categorize each loan, and then submit a proposal for all ten. Of the class A loans, 3 of them may be at par and 2 of them may be at 80-90%. Of the class B loans, assume we negotiate them at 60-70%. For the class C loans, assume we offer to purchase these at 50% or below the face amount of the loan. The class C loans would most likely be pulled out for FFCIC to do a longer-term work out. At such time as they are worked out, whether turned around with the borrower or a new buyer brought in under a new loan, they would either be put back in the loan portfolio or sold off. Keep in mind par is still 60-70% LTV, so even if we are buying at par, we are still in the property at a safe margin.
Scenario #1
Buying out loans at par are still good deals. For example, say the borrower owes the bank 60-75% LTV but is in default and the lender feels they are well collateralized, and we agree after a thorough examination. In this scenario, we may buy the loan at par in a short sale or deed in lieu of foreclosure with a sale lease back to the landowner. After analyzing the deal and substantiating that the property is worth the appraised value (and in some cases more) we would capitalize on the opportunity by proceeding to purchase the deal as the margins would be at a minimum of 25%-40%, or more, depending on how much we can lower cost, increase yields and any unrealized income opportunities we unfold from our management expertise.
Scenario #2
Buying loans at a discount whereas the lender is tired of the deal and/or the regulators writing them up on the loan. In this scenario we would negotiate a buyout at something less than par in recognition of the issues. For this scenario, assume the lender had a real estate loan at $7,200,000 and had then put an operating loan in the face amount of $2,200,000 against the equity, such that the total owed was $9,400,000. Assume that the borrower was in default on the operating loan. The bank will generally take the original amount (although often less) of the real estate loan and write off the operating part of the loan, which would be $2,200,000. In the event we could not get the borrower an operating loan or new real estate loan, we would then sell and/or auction the property to generate the highest return.