Garnet Capital Advisors Blog

There comes a time in every economic cycle when it is relevant and prudent to review the assets on one's books and determine which assets should stay and which should go. The economy is so turbulent at this time that it is the perfect moment to contemplate the relevance and profitability of various assets to try to remain financially solvent and thriving. Many banks are active in the process of reviewing their books as we speak, and they are surely contemplating the necessity of offloading some of their underperforming assets. Fortunately for the banks, right now is the ideal time to be in the market for selling off certain assets that might be underperforming or otherwise causing a drag on the balance sheet. There is a lot of capital ready to go to work purchasing up some of these less than ideal assets. We want to take a look now at some intricate economic factors at play and how banks can best position themselves going forward.

The Regeneration Of The Lodging Sector

The COVID-19 pandemic largely put the lodging sector on ice for an extended period of time. The government had issued stay-at-home orders, and the amount of travel that individuals could do instantly fell off a cliff. Not only were leisure travels out of the mix, but even those stalwart business travelers that the industry relies so heavily on were suddenly nowhere to be found. They had been asked to start working from home, conferences were canceled, and there were few (if any) reasons for someone to need a hotel room for business travel at that time.

What few people predicted at that time is just how quickly the industry would rebound. The biggest sign of the lodging rebound is the rapid pace at which some tourism areas have seen their numbers return. Yahoo! Finance was quick to point this out in a recent piece that they released regarding the return of the lodging industry and routine travel in general. They reported the following information from the Lieutenant Governor of Hawaii:

After suffering the worst spike in unemployment among all 50 states, Hawaii's economy is roaring back with a recovery that's fittingly outshining them all.

Bouncing back from a strict lockdown that decimated the state's tourism industry after blocking nearly all travel to the island, Hawaii has seen tourists return at a far faster rate than expected, according to Lt. Gov. Joshua Green.

"When people thought it would take us several years to get back, I knew that wasn't right," he told Yahoo Finance Live Wednesday. "We're already fully back with our numbers."

This is good news not only for vacation-seeking travelers and the people of Hawaii but also for banks looking to offload some of their lodging-based loans. Garnet Capital, a broker that acts as the go-between for banks and those interested in purchasing their loans, states that many lodging loans are selling for rates that clear their present book value. This is because buyers are so eager to get into this market now that a certain sense of stability has returned to the world. There is a feeling that pulling through the difficulties that have resulted from the COVID-19 pandemic is something that this industry may yet be able to do.

Banks are likely interested in getting some of these loans off their books not because they necessarily think that these loans will underperform, but rather because they can be a drag on available capital reserves. Once a loan becomes criticized, additional capital has to be allocated to that loan. Why tie up capital when there is a market hungry for purchasing these loans? That is the thought process currently being batted around in many corporate bank offices.

The Commercial Real Estate Boom Is On

The buying frenzy being exhibited by many big money interests is not exclusively focused on the lodging sector at this time. Rather, it has spread its wings to many other parts of the economy as well. Commercial real estate is one area that is experiencing almost gold rush style interest right now, and there is no sign that it is going to let up anytime soon.

An interesting fact about the current commercial real estate boom that we are experiencing is the fact that much of it can be attributed to an interest in industry and factory spaces. Traditional corporate office spaces are not necessarily seeing as much interest as it is firmly believed that many jobs will continue to be work-from-home jobs into the future. However, CNBC reports that rents for commercial office space are up over 7% compared to the same time last year. Some of this rise may be since at least some people are finally returning to the office, but it is still quite unusual to see that level of increase in a single year.

When groups of loans in banks become distressed, it is a drain on capital. This is a considerable concern for many banks, and it is a good reason for banks to consider partnering up with a team such as Garnet Capital to offload some of the debt that they currently hold in this area. Investor interest is at some of the highest levels in recorded economic history, so there is no time like the present.

Investors Are Seeking Yield At A Time Of Low-Interest

It is difficult to predict what effects the Federal Reserve will have on interest rates long term, but they certainly seem content to keep interest rates at the incredibly low rates that they have been stuck at for well over a decade. Many of those investors will put at least some of their funds into the stock market to be sure, and this may be a contributing factor to the recent all-time highs that the market has continued to enjoy. Still, some investors prefer to invest in debt rather than take a roll of the dice on individual equities. Thus, many investors are bidding on the loans that banks have on their books.

Garnet Capital works diligently to bring buyers and sellers together for all types of debt products. They are committed to helping make sure that everyone is satisfied with the transaction and that they fully understand special bank assets. It is this very dedication that has helped them earn a stellar reputation over the years, and Garnet continues to do so despite the uncertain economic climate. Banks and investors alike can put their trust in the work that Garnet does.

Please contact us for the latest updates on the economic situation and how it may impact your ability to buy or sell debt assets.