Head2Head: DebtMarket, Debtx Ride Wave of Distressed Loan Sales
March 8, 2010
Nearly $2 trillion of maturing commercial mortgages are unlikely to qualify for refinancing over the next three years, according to estimates by Deutsche Bank and Lombard Street Research. Up to 2,000 banks are expected to fail or be acquired by 2013, in Accenture's estimate. So it's easy to see why vendors are clamoring to offer lenders electronic ways to list and sell their loans onscreen to buyers such as hedge funds, private equity firms and banks.
Housing prices are only recovering slowly, from the crash that began in the last half of 2007. A tsunami of loan sales looms. That's because, if the credit quality of banks' residential, commercial and other loan portfolios deteriorates much more, institutions will be forced to sell their loans into the marketplace to shore up their books, recoup some portion of their original investment, or avert failure.
Therein lies an opportunity, for electronic markets that help clear out loans, distressed and otherwise. Two of the most high-profile online platforms include DebtMarket, which launched Aug. 17, and Debtx, which has been brokering sales of distressed debt since 2000, and is considered the market leader.
DebtMarket and Debtx provide an alternative to hanging onto credit card, auto, residential and commercial loans, in a market worth roughly $8 trillion in lent-out capital.
These fee-based marketplaces allow sellers to list their loans on the Web for buyers to peruse, perform analyses, bid and complete due diligence, all onscreen. Closings of loan sales are still paper-based, but the rest can be done electronically.
The sites help sellers get performing, distressed or non-performing loans off their books and offer opportunistic buyers centralized places to shop for loans. The whole loan market exists because holding loans or selling them into pools for securitization is not always possible or desirable. Mostly, a group or "portfolio" of loans is offered on these systems, but buyers can select individual loans to purchase.
DEBTMARKET
DebtMarket, for example, includes an "internal email system," which buyers and sellers can use to anonymously ask questions of each other after loans are first "listed" or offered for sale. They can also use the email module to negotiate and place non-binding bids.
DebtMarket is currently developing an instant messaging system clients can use for questions and negotiating for launch later this year, said Mike Sheridan, president and co-founder of DebtMarket.
After a seller accepts a conditional bid on DebtMarket, buyers must sign a non-disclosure agreement with the seller. Then they can view on their computer screen in DebtMarket's Data Room all the loans' contracts, pay histories, asset valuations, credit reports-any data that the buyer has stipulated.
"They can do contract-level due diligence right from their desktop," Sheridan said. "In the past, the buyer would have to do this onsite."
Once a loan portfolio is in due diligence, buyers and sellers may directly communicate via phone to tackle any small details or issues, "but most continue to use our messaging system so that a centralized audit trail of all communication exists," Sheridan said.
After due diligence is completed, buyers submit a final offer, citing the exact loans they want to buy. Following that, the buyer can choose to upload their buy/sell agreement to DebtMarket's Contract Room, where buyers and sellers can both review and negotiate final terms.
