One result at the credit crisis that has rocked this nation’s financial system over the past year has been an abundance of distressed debt for sale in the commercial marketplace. Well, one man’s trash may indeed be another man’s treasure, since a growing number of firms are interested in purchasing this debt.
Buyers of distressed debt strive to purchase nonperforming loans at a discount and then use their experience in working out problem loans to collect them and turn a profit. They are set up with the infrastructure, expertise and personnel (e.g., attorneys, professional liquidators) to do this more cost-effectively than most banks can.
For community banks holding nonperforming commercial loans primarily secured by real estate or equipment, this may be a viable Option worth considering. However, you must take emotion out of the equation and reduce it to a simple business decision. Consider what will result in the most money to your bank, present-value, for the least time, cost and risk — selling the debt in the commercial marketplace, continuing to work with the borrower toward a resolution or liquidating it.
As the number of firms buying distressed debt grows, so do the options for sellers, who may have more bidders to choose from. Buyers need to build volume, so increased competition may drive the price for nonperforming loans higher.
Several different clearinghouses have also emerged to connect sellers of distressed debt with potential buyers. The most popular is www.DcblX.com, which operates the world’s largest online marketplace of buyers and sellers of commercial debt.Think of it as an eBay for debt: You simply input broad data on loans you want to sell into the website, and buyers come back to you with bids, with DcbtX taking a fee for successful matches.
Financial Lending Notes 2008:
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