The U.S. economy and banking sector are both under duress. The market is plagued by several co-occurring challenges, including ongoing inflation and the Federal Reserve’s attempts to stymie it via elevated interest rates; uncertainty surrounding declining commercial real estate (CRE) valuations; and a severely restricted CRE lending market.

Numerous U.S. financial institutions are stressed. Others are also likely to experience strain over the next 12-36 months as the regulatory environment, general economy and commercial real estate concerns loom. As the primary providers of commercial real estate loans, community and regional banks are severely impacted. Not only are many of these banks’ balance sheets loaded with loans coming due for repayment, but many of those loans are bridge product (i.e., shorter-term transitional loans financed during recent years when interest rates were exceptionally low). With values now impaired, many of these institutions are reluctant to extend or refinance these loans and are thus facing loan performance risks. Many will be forced to move these assets off their balance sheets to reset, raise additional equity or to undergo mergers and acquisitions.

Many banks are dealing with increased scrutiny from their primary regulators and the FDIC, in part as a response to congressional heat surrounding recent bank failures and what was done, or not done, in advance to prevent them. Increasingly aggressive review and criticism of bank capital positions is occurring considering loan performance and valuations.

Emerging Investment Opportunities
Despite this tenuous economic environment and banking duress, investment opportunities are emerging for those investors who possess an appetite, skill set and background to participate in critical solutions, and assets and investments ideally positioned to rebound over the medium- to longer-term.

Two major investment opportunities include:

• FDIC Structured Transactions with Private Sector Partners: The FDIC has begun taking action following the recent bank failures and the probability of additional, impending distress. In a sign of the magnitude of the current situation in banking, the FDIC is instating a program like the Structured Transactions Program it implemented during the Global Financial Crisis. The FDIC requires seasoned private sector partners to participate in bank loan portfolio transactions as joint venture partners. Potential partners must be well capitalized with the ability to move quickly, as well as able to demonstrate past operational successes in resolving distressed bank assets. There is currently a limited field of experienced partners that meet these requirements, however those that do can potentially generate a compelling risk/reward profile.
• Proprietary, Privately Negotiated Bank Transactions: While the FDIC will play a crucial role in resolving bank distress from banks in receivership, the majority of transactions will likely occur outside of FDIC led portfolio sales through merger- and acquisition-driven transactions. In one of these scenarios, one or both institutions will require the other to dispose of problematic real estate loans, or portfolios of loans, as part of the negotiation for the ultimate merger. Another scenario occurs when banks dispose of assets when seeking an infusion of fresh capital to shore up their capital structure. In both cases, creative solutions delivered by savvy partners are essential. Successful solutions notably call for an investor partner with the capabilities to take on any, and all, types of assets regardless of geographical location. When offering a wholistic approach based in deep banking experience, a portfolio transaction provides a single means for clearing the balance sheet and a complete solution that allows the bank to reach its goal – restored confidence in the institution among investors, regulators, clients and acquisition targets.

Participants in these strategies require a well-capitalized partner with relationships, robust infrastructure and the agility to execute quickly. That partner must also demonstrate a proven track record spanning the full economic cycle, not just during bullish conditions.

Your Trusted Partner: Sabal Investment Holdings

Sabal’s journey began in the depths of the Global Financial Crisis, when its founder recognized opportunity while most others pulled back and sat on the sidelines. Sabal’s reputation was first established through its Principal Investments business, which served as a private sector partner to the FDIC in its Structured Transactions Program. Over the years Sabal completed significant joint venture transactions facilitated by the FDIC, acquiring large portfolios of distressed commercial real estate assets from banks in duress. In addition, it provided bank credit advisory services during this period, analyzing 80 bank balance sheets and purchased additional distressed loan portfolios in direct bank transactions. Under the leadership of Sabal’s management, nearly $8.2 billion in assets were acquired (more than 5,000 CRE loans comprising multifamily properties, commercial real estate and land), resolving every last one successfully.¹

Today we are just one of few of the FDIC’s partners from that era still fully intact and we are ready to step in to help once again.

For more information, visit www.sabalinvestmentholdings.com.

¹Sabal refers to Sabal Investment Holdings and its various current and former affiliates. Past performance is not indicative of future results.

About the Author

Pat Jackson is founder and chief investment officer for Sabal Investment Holdings, the Irvine, California-based investment management firm serving institutional investors across the United States.

 Disclosures

The views expressed herein are those of the author in the current economic environment and are subject to change. These views do not qualify as investment advice. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is not indicative of future results.  There is no guarantee that investment objectives will be achieved or that profits will be achieved or that substantial losses will be avoided.

This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. Neither the author, Sabal or any of its affiliates or principals assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.