Here's a topic thrown out there for a Friday afternoon in August, would be interested to hear feedback from the SFI board.
1. SFI is holding off from selling major portions of it's distressed asset portfolio until (a) pricing improves in the market for these assets, and/or (b) they need some cash for obligations.
2. Many other lenders with bad assets have held back from dumping big pools of bad assets on the market, also waiting for a better future time to sell.
3. The result has been a relatively small amount of commercial real estate loans/REO actually offered for sale to date. Very little supply, with a tremendous amount of demand amassed on the sidelines waiting for deals (hedge funds, P/E firms, foreign investors, distressed asset funds, Starwood REIT).
4. Project forward a year and let's assume the economy is a bit stronger, the capital markets for real estate are a bit healthier, and prices have begun to stabilize and move up. SFI decides to start increasing the number of deals they offer in the market. But everyone else with bad assets also decides to come to market as well.
5. These other potential sellers are among the largest institutions out there and they have HUGE CRE portfolios. B of A, Wells Fargo, PNC, GE, Goldman, not to mention the FDIC will have huge pools of CRE to sell, and I believe the senior bondholders in CMBS/CDO transactions will also be forcing sales of assets into the market.
6. So, the environment will be better, but the SUPPLY will potentially be a TSUNAMI. At that point in time, the other big sellers of assets (the B of A's, WFC's, GE's) will have had 4 to 6 quarters to repair their balance sheets and reserve, reserve, reserve. These sellers will try to get the best price (who wouldn't?) but they will also be very well positioned to just dump assets at low-post reserve prices and move on. They will have the capital ratios to be able to do so, and we all know the FDIC has the ultimate capital ratio to dump and move on.
7. So my questions are: Is there a flaw in the SFI logic to wait and see before selling? Will they be selling into a market that has a huge supply of similar deals, as compared to now when there is a relativel small supply of deals offered? Will the massive supply offered in the market result in a persistent downward pressure on prices for all sellers?
And, finally, is SFI holding back from selling these bad assets now because that's the absolute best strategy for them, or because they just can't sell them now at these prices and with their liquidity/leverage situation??
When SFI starts to sell big, they are likely to be among the weakest sellers as measured by leverage, equity capital to absorb losses, and liquidity. B of A is booking big pre-reserve profits every month with this yield curve, they are earning their way back to health. SFI does not have that benefit.
When you reply to a post I've written and make the statement "To say SFI is more regulated than commercial banks is crazy." the logical implication is that you are rebutting something I've said as if it were "crazy".
However, as you point out in your exculpation, I did not say that, and to my knowledge such a sentiment has never been uttered by any human being in the history of the universe. So you've taken it upon yourself to rebut and characterize a statement that's never been made, unless a keybot took over typing.
My point in bringing attention to this is to expose it as a:
"A made-up version of an opponent's argument that can easily be defeated. To accuse people of attacking a straw man is to suggest that they are avoiding worthier opponents and more valid criticisms of their own position: “His speech had emotional appeal, but it wasn't really convincing because he attacked a straw man rather than addressing the real issues.”
from the Cultural Dictionary...
Intentionally or unintentionally it is the habit of some to make outrageous and/or distorted claims about or interpretations of what a poster has written in order to avoid the force and legitimate points of their argument. That, to me, seems a scourge worth rebutting.
That's it, finito, I'm done with this (I hope).
Um, let's see.
In direct response to my post, you said:
>To say SFI is more regulated than commercial banks is crazy.<
But I guess in your mind you didn't say that, or it was touchy feely?
Let's try for a modicum of forthrightness, anyway.
SFI has a very large portfolio of assets. Some of the purchase-lease back properties can be sold even in a very bad market if Istar needs cash and does not want to take a huge haircut on some of the NPL, NPA, and REO assets.
I agree that it is better to get rid of the "dogs" if possible, but not at any price. The terms of the secured bank revolver allow the selling of their best assets if necessary replacing them with less desirable assets. This was a very, very, important feature of the secured revolver that may make all the difference as we move through difficult times.
Interesting questions at the beginning of this thread. Also, interesting comments. The focus in this thread has been on asset activity.
Here are some ideas that should be added to the mix:
1. Inflation. If SFI can hold out for a year and a half, its borrowers will have more dollars to repay their loans and its collateral will significantly increase in dollar pricing, even if not in real value.
2. Cycle Swings. Everything about the down cycle is being over done. Just as the bubble went way to high, the crash is going too low. GDP has swung too low and will swing back up in dollars terms. CRE valuations have swung too low and will have to swing back up substantially just to return to normal.
3. Financing Activity. As has been said here before, many of us believe SFI has a very large book value and just needs to maintain enough liquidity to pay debts as they become due. The $1 Billion refi was really a turning point, IMHO. There is a large group of banks that believes SFI will survive. SFI likely will be able to tap the capital or bank debt markets again, and can refi and extend additional debts if necessary.
You make some good points - as you might say applicable to every other lender out there.
It is unknowable whether their strategy will work or not.
What's missing from your post, which includes words like "dumping," "big pools of bad assets," "SUPPLY," "TSUNAMI," "reserve, reserve, reserve," etc. is a sense of proportionality.
First of all, iStar has huge reserves (insufficient or not) of $1.5 Billion on $4.6 Billion of NPLs. That ratio is considerably higher than the reserve ratios of the institutions you cite as being in better position to sell distressed assets. iStar has already taken the earnings hit. BA and others have been impeded from reserving due to regulatory capital and other regulated institution metrics. It's not plausible to hold them out as paradigms of reserve policy.
Secondly, in this "TSUNAMI" of forthcoming CRE "SUPPLY", iStar has a grand total of about $3 Billion worth of assets - net of reserves - to get rid of. It's a laughable rounding error in the CRE swamp. They are tiny and their sales won't materially impact supply or demand.
Third, iStar has publically available debt selling below par with which to offset asset resolution deficiencies.
Fourth, iStar is less leveraged than BA, WFC, PNC, GE, etc.
Fifth, iStar has been cash flow positive/neutral through this morass. They have done a remarkable job of liquidity management, given the headwinds.
>When SFI starts to sell big, they are likely to be among the weakest sellers as measured by leverage, equity capital to absorb losses, and liquidity.<
As noted above they won't be selling "BIG" since they are tiny, and you have no support whatsoever for your hypothesis that they are likely "to be among the weakest sellers". In fact, so far they are acting in exactly the opposite way.
It seems that you share the typical analyst's mortification with the unknowns and sloppiness of the real world. There are no answers to the questions you pose. I have no idea how many people will walk into my store next month and buy stuff, either.
iStar isn't for the faint of heart or those unable to tolerate uncertainty. Your comment that BA is "earning it's way back to health" is a little facile given that they haven't marked their asset book to reality, and if they did they'd be insolvent.
Bottom line: nothing new, same set of facts differentially processed by different people, not all of whom can be right.
Banks in general take much more reserve for NPL compares to SFI. I just did a quick google reserach and got this: http://www.fiercefinance.com/story/loan-loss-reserve-cushion-weak-bank-america-citigroup/2009-04-20
<<First of all, iStar has huge reserves (insufficient or not) of $1.5 Billion on $4.6 Billion of NPLs. That ratio is considerably higher than the reserve ratios of the institutions you cite as being in better position to sell distressed assets. iStar has already taken the earnings hit. BA and others have been impeded from reserving due to regulatory capital and other regulated institution metrics. It's not plausible to hold them out as paradigms of reserve policy.>>
Quad, thank you for the post, which unfortunately I do not have time to fully respond to right now. But you should spend some time taking a look at the facts and get educated about the lending world outside of SFI. Here's an easy start for you. Take a look at the Q2 earnings PDF on B of A's investor relations site. You will see that at Q2 BAC had $75B of CRE with $6.7B of NPL's (8.9%). That compares to SFI's $4.6B of NPL's on about $11.5B of loans (40% NPL). As you point out, SFI has reserved $1.5B against the NPL's, or 33%. BAC's reserves against the $6.7B of assets total $2.4B, or 36%.
What data are you basing your quote above on? Did you make it up? I think your tunnel vision regarding SFI has not allowed you time to get all of the facts.
Should I even respond to some more of the points made in the rest of your post? Are they based on facts, or just opinion?
Part of the support for my hypothesis about SFI being among the weakest sellers is based on the potential for generating earnings/cash flow between now and when they start to sell "big" (potentially having to sell 40% of your loan book is a good definition of "big" for me). BAC generated $16B of pre-tax, pre-provision earnings in Q2. That is $16 Billion. Those earnings are only going to grow from here (with liability rates near zero for the banks), so I'd say that is partial evidence that SFI might not be at the top of the list of healthy financial institutions out there.
You should spend more time trying to understand the facts before you join the debate.