Current State of Play for Investors and Lenders in the World of Distressed Debt and Assets

Things are finally looking up in the world of distressed debt and assets. The credit market is on the mend, liquidity has improved, and there are fewer defaults and more loan sales. The residential side is experiencing a slower recovery, however.

Tune into the latest episode of Deloitte Insights to learn more about the current state of play for investors and lenders.

Speaker

Guy Langford, M&A Transaction Services, principal, Deloitte & Touche LLP
Steven Bandolik, Director, Deloitte Financial Advisory Services LLP

Transcript 

Sean O’Grady, Host, Deloitte Insights: 
Hello and welcome to Insights. Today, we are checking in on the world of distressed debt and assets and what opportunities it may hold for investors and lenders. On the desk with us in New York for this checkup is Guy Langford, an M&A Transaction Services principal in Deloitte & Touche LLP, and we have Steven Bandolik, the director of Deloitte Real Estate Services within Deloitte Financial Advisory Services LLP. Gentleman, thank you both very much for joining us today. We are halfway through 2011. I would like to know what distressed debt and asset trends are you seeing right now in the marketplace, Guy?

Guy Langford: I think we’re seeing a few things right now. We are definitely seeing that there are some declines in some of the new distress, which is a positive sign. I think in prior years, we saw banks holding onto loans and extending the maturities. I think now we are definitely seeing a trend where they are actually starting to work them out. That’s a good sign. Secondly, I think we’re also seeing examples of sales in the marketplace of distress. So, not only the banks are actually looking at what they have got and trying to work through them, there are actually some active sales transactions, which is real positive. I think one of the things that we are also seeing is we have some improvement in some of the loan quality that is out there with some new originations, and I think that’s creating a positive lending environment. So, banks are prepared to look at what they have got, work on it, and we are starting to see some new credit improvements as well.

Sean: And Steve, how about you, your perspective on the landscape?

Steven Bandolik: Well, I agree with Guy, but the credit market is still recovering, which we didn’t expect. We thought it would be quicker rather than slower. Basically, they seem to be on the mend. There is improved liquidity in the system, which is very, very helpful. There are fewer defaults, and right now, we are starting to see some loan sales. We expected that much quicker, but it is happening now. On the residential side, we still have a lot of issues because there are still a lot of foreclosures going on, we still have the unemployment levels going on, and home prices are not improving the way people would like them to.
Sean: Well, thank you for that. Now, we have seen in a number of deals in the past year or so. Some examples, we have got Centro by Blackstone and the Hyatt Center over your native town of Chicago, Steven. What are these deals telling you about the market?

Steven: I think Guy and I talked about this afternoon. The top 20% of the market has started to come back and doing quite well, the bottom 20% of the market still has some real issues, and the middle 60% is not wonderful, but there have been some real trades, as you know, both in New York, Chicago, and throughout the United States, mostly in tier cities like New York, Washington, DC. And as you are aware, there have been some major M&A deals that have been done recently to include the Blackstone-Centro deal as well as the Brookfield-GGP transaction.

Sean: Guy, your thoughts?

Guy: There is a plenty of capital chasing distressed right now, Sean. We are seeing a number of different permutations. We are not only seeing the private equity funds that have amassed a lot of capital, specifically focused on distressed opportunities, but we’re also seeing some of the REITs that are out there buying individual assets. We are seeing some of the nontraded REITs as well getting active in the marketplace. Interestingly, Steven mentioned the trend of focusing on some of the largest cities, the gateway cities if you will. I think, going forward, we would expect to actually see a waterfall effect in some of the secondary or tertiary markets as well because there is a lot of capital chasing these distressed opportunities.
Sean: Well, let’s do that. Let’s pull out the crystal ball because we have been talking about the trends, but really what might happen in the next 12 months, Steven?

Steven: Well, I think we have got to remember what we call the wall of maturity. There are a lot of loans that are going to be maturing over the next 7 to 10 years. The peak of the market, as you know, was in 2007 and lot of those loans had a 10-year maturity, so they don’t mature until 2017. Based on estimates, there is about $1.7 trillion, it’s not billion but trillion, that are maturing between 2011 and 2015. There are a lot of situations right now that still have to be worked through.

Sean: Guy, your final thoughts?

Guy: Well, I referenced that there is a lot of private equity capital. There is 162 billion plus of private equity capital, there is about 80 billion plus of non-traded REIT activity, and there is a large public market now that it is actually proving to be quite liquid for new offerings in the REIT space. There is a plenty of capital on the sideline, which is a real positive. Then, if you look to the debt side of the equation, you start seeing a number of new originations that are occurring with the large banks. We are starting to get the band back together. We are getting the lending outfits, and the origination outfits are starting to look high-quality loans in cash flowing properties. We are seeing some of the life insurance companies are starting to also originate new products for lending. We are also seeing a number of new kinds of boutique outfits coming out of the marketplace who are originating new products, trying to establish a new market footprint, so when you combine that on the lending side and then you add to the fuel the CMBS kind of improvement that we are seeing for commercial mortgage-backed securities. At the peak of the market, that was a $240 billion funding source. And last year, it was about $10 billion, so projected for FY11 about $45-50 billion. You have got plenty of capital and you have got a lot of debt now coming into the marketplace as well as new origination. So that they are two really positive signs that will manifest new transaction activity. I expect we will see a lot of trades, and I expect we will see a lot of different marker participants playing in those trades as well.

Sean: Very interesting! We will have to keep our finger on the pulse. Gentlemen, thank you both very much.

Steven, Guy: Thank you.

Sean: Alright, we have been talking about real estate distressed debt and assets with Guy Langford, a principal in Deloitte & Touche LLP, and Steven Bandolik, the director of Deloitte Real Estate Services within Deloitte Financial Advisory Services. If you’d like to learn more about Guy, Steven, or any the topics we have discussed on this program, you can find that information and much more by visiting our Web site, it is www.deloitte.com/us/podcasts.

For all the good folks at Deloitte Insights, I’m Sean O’Grady – we’ll see you next time.