In the aftermath of the failures of Silicon Valley Bank and First Republic earlier this year, regional and mid-sized US banks are actively seeking to sell their loan portfolios. These banks are aiming to generate cash flow and reduce capital requirements. This trend has resulted in a surge of portfolios being offered to investment firms such as Ares and KKR, encompassing various loan types, including car and consumer loans, commercial real estate, and specialized finance. The willingness of sellers to offer these portfolios at significant discounts to face value has made loan pricing increasingly attractive to purchasers.
PacWest, a California-based bank facing pressure after the collapse of SVB, recently sold $3.5 billion in lender credit loans to Ares. The first tranche was sold for $2.01 billion in cash, slightly lower than the $2.07 billion principal debt. Additionally, PacWest sold construction loans to Kennedy Wilson real estate investors for $2.36 billion.
These transactions indicate a growing trend among banks to sell their highest-quality, short-duration, variable rate assets. Industry experts believe this is just the beginning, with the next wave likely involving the sale of non-core bank assets as banks streamline their businesses.
The bank failures have served as catalysts for regional banks to reevaluate their portfolios and consider selling assets that are no longer core to their operations. Deposit outflows and share price drops experienced during the crisis have further driven the desire of many banks to increase their liquid assets. Furthermore, impending regulatory changes regarding capital requirements and liquidity restrictions have prompted banks to proactively address these concerns.
Investors and private credit firms such as Ares and KKR are capitalizing on this trend, expanding their portfolios and staff to accommodate the increased demand for loan acquisitions. Banks that have traditionally purchased specialist finance company loan portfolios are scaling back, providing an opportunity for private credit investors to step in and fill the gap. This shift has resulted in increased transaction volumes in the real estate sector, with banks like HSBC's US unit accepting lower bids for their portfolios.
While many regional banks are divesting their loan portfolios, Goldman Sachs is taking a different approach. The Wall Street giant recently incurred a loss of $470 million by selling some retail loans and listing the rest of its Marcus digital retail bank portfolio. This move signifies a retreat from mass-market lending and highlights the divergent strategies employed by various financial institutions.
This ongoing shift in loan portfolios signifies a broader effort by banks to de-risk their systems and enhance their financial positions in response to regulatory changes and market conditions.