Written by Mission Capital Asset Sales:
Secondary Market Asset Sales Environment
Liquidity in the secondary market increased substantially following the global financial crisis. High-yield debt funds attempted to raise a record $66.7 billion of equity to invest in high-yield commercial real estate debt in 2016. The $66.7 billion represents 21.5% of all attempted equity raises for investment vehicles in 2016 that invest in commercial properties, debt, or both. That figure represents the highest percentage of total equity raise devoted to high-yield funds since the statistic was first tracked by Real Estate Alert in 2003.This increased liquidity has further legitimized the whole loan trading business. What was once perceived as an avenue for distressed or special situations trading has evolved into a market for transactions occurring in the normal course of business. Motives for divesting assets now stem not only from risk management related to “problem assets,” but also from M&A activity, compliance with internal or regulatory concentration limits, along with a host of other routine portfolio management practices. Price expectations in this ever more liquid market, in conjunction with opportunity-cost for investors evaluating increased product volume, necessitates quality data to bridge the bid-ask gap.
Value-Add of Due Diligence
As the secondary market for whole loans continues to mature, the role data plays in facilitating timely transactions at market-clearing prices has become increasingly important. Banks, funds, servicers, and other lenders exploring the sale of assets may be penalized for incomplete data by investors making conservative assumptions to protect against downside. Servicing systems, designed primarily to manage loan administration rather than facilitate asset management, are inherently limited in their ability to supply the robust data needed to effectuate a loan sale. These systems often fail to memorialize collateral release and / or addition, relevant borrower and guarantor detail, along with other pertinent information for underwriting a loan. Additionally, over the life of a loan data may be “lost” due to servicing conversions, loan modifications, or hosting on legacy systems. Data pitfalls don’t end with the servicing system; further compounding data inadequacies are factors including regulatory changes requiring increased disclosures for compliance, document exceptions, and the dilemma of covenant checks where lenders are often dis-incentivized from confirming compliance (non-compliance necessitates a downgrade, whereas no action is required otherwise). Sellers are often tempted to market assets without first packaging diligence under the rationale that reducing time to market will increase interest and minimize externalities. This is often done at the risk of impacting pricing and actual transaction timing. Responding to investor data requests during the course of a transaction diverts resources that are better focused on the marketing effort. Surprises, such as missing documents and lien issues, may be more difficult to cure during the course of a transaction and could even result in pricing adjustment or closing delays. Conversely, getting in front of diligence issues typically leads to stronger execution from a time and price perspective.
Mission Capital’s Answer: Secondary Market Surveillance
Providing a succinct diligence package can seem like an arduous task, but doing so in advance of a transaction invariably pays off in the long term. Aggregating data from various systems and obtaining documents from numerous sources, including custodians, file vaults, asset managers, and outside counsel, in itself can be a challenge. Once data and files have been gathered from disparate sources, organizing this information into a succinct diligence package often appears a monumental undertaking. Mission Capital has solved for this challenge through our proprietary due diligence platform, Secondary Market Surveillance (“SMS”). The SMS platform provides permission-based portal access for all stakeholders in the loan evaluation process, streamlining due diligence by serving as a single repository for data management. SMS is constructed on relational database technology, which allows seamless underwriting and analysis of multi-loan asset relationships as well as loans with numerous collateral items and borrower / guarantors. Real time reporting is available through customized dashboards and data extracts. Banks, servicers, and funds that have leveraged SMS to perform due diligence in advance of a loan sale have uncovered real value through the process. By utilizing SMS, Mission Capital was able to determine that a significant portion of a client’s non-performing loan portfolio slated for sale was nearing the statute of limitations for initiating legal action. Asset managers and third party counsel accessed SMS reports to determine which loans were in question, and either initiated legal proceedings or structured a sale such that closing would occur prior to the end of the statutory period. SMS is equally useful for uncovering value with performing loans. When underwriting a re-performing loan pool in SMS it was discovered that the lender frequently took additional collateral as part of loan restructuring. Robust data tapes extracted from SMS reflected nearly 20% more collateral than had been reported in the client’s initial servicing tape. Another due diligence project involving a portfolio of seasoned performing loans revealed that the risk profile of the portfolio had declined since origination, allowing the lender to present a data tape featuring improved property occupancy and NOI relative to that which had been reflected in the servicing tape. Increasingly competitive markets favor good data and rapid transactions. Robust data tapes allow investors to quickly and accurately price portfolios, while arming sellers with rebuttals to potential concerns that arise during the course of investor due diligence. Utilizing a diligence platform could mean the difference between a smooth transaction which meets deadlines and achieves strong bids, and a drawn out, resource intensive trade or dreaded “no-trade”.
To learn more about Mission Capital’s Due Diligence services and SMS platform please click here.