A combination of lender fatigue and regulatory pressures has increased the supply of distressed bank debt available to hungry investors in the secondary loan market. "What we're seeing is a real opportunity for a distressed investor that will take the time to affect the turnaround and reap the rewards [because] the bank group is not necessarily ready to do so," said Lance Miller, director at Glass & Associates.
The evolution of the secondary loan market has given lenders, which signed on to credits during syndication, the opportunity to sell off their exposure rather than stick with the credit through the end. Moreover, the pricing of the loans in the secondary market is not an accurate reflection of the ultimate recovery value. "I don't think that there is enough trading in the bank debt markets to make that a good indication," said Deborah Hicks Midanek, principal at Glass & Associates.
Some investors could be scared off by large banks selling their exposure to credits, but players should be aware that banks often sell off pieces of loans for reasons that have more to do with the internal economics at the bank rather than credit-specific issues, according to Ralph Palma, senior v.p. of managed assets for FleetBoston Financial. "You must understand the seller's motivation for selling larger credits," he said. In addition, banks have a heightened sense of self-regulation, he noted, explaining that banks try to actively manage their portfolios before the regulatory agencies come in.
A few speakers noted that regulators--in conjunction with the Shared National Credit exam--were more stringent this year than they had been in past years. The results of the exam, which were released last week, revealed that the number of loan commitments for which banks had to take on extra reserves increased by 34% from last year.