The secondary market is now firmly placed as a viable enforcement option in distressed situations to be weighed up against the long-term capital cost and uncertainty associated with informal workouts and the stigma of formal enforcements.
Despite this, where is the flow at? We all know the benefit for par lenders in trading out: the release of constrained capital, the opportunity to redeploy capital and to crystalise tax losses. As noted last year, however, while there is an ever-increasing demand for flow, supply-side pressure and soft economic conditions continue to hold back market growth and there has been limited activity in the public space.
This has been countered with an increase in activity in the single credit bilateral space and one-off portfolio sales which continue to buoy the market; portfolios with a face value in excess of A$12 billion have changed hands in the year ending 30 June 2016 (including the A$8.2 billion sale of ANZ's Esanda receivables business and GE's commercial book sale with around A$4 billion face value).
In the private space we continue to see more non-traditional participants enter the market and look to acquire stakes and leverage through debt participation trades.
Reasons for this growth in the private secondary market include:
- increased lending hurdles and heightened risk exposure for traditional lenders;
- an oversupply and pricing pressure in particular sectors of the property market (inner city apartments in Melbourne, Sydney and Brisbane in particular);
- continued slowdown in the mining and mining services sectors; and
- traditional lenders' continued preference for avoiding the costs, risks and negative publicity associated with formal enforcement action.