By : Harry Terris | September, 1 2008
Popular Inc.'s deal to sell about $1.17 billion of subprime mortgage assets and servicing rights to Goldman Sachs Group Inc. would essentially complete the disposal of its U.S. consumer finance business and resolve its liquidity needs.
The agreement for Popular Financial Holdings, announced last week, is another example of the growing number of transactions characterized by pressured sellers, opportunistic buyers, and deep discounts.
Richard Carrion, Popular's chief executive, said in an interview that conditions for such transactions remain difficult.
"There's no real market out there. There are very few buyers," he said. "It is not easy. We felt, one, we had to address the liquidity situation, and secondly, we want to strengthen the balance sheet as much as possible. Probably sometime down the road, this will look like we sold them too cheap."
The $41.7 billion-asset San Juan, Puerto Rico, company said that selling the assets would free up about $700 million of liquidity, and that it expects to recognize a $450 million loss as a result.
Popular Inc. had already written down the assets, and the deal was priced at about 35 cents on the dollar in terms of the loans' principal value, Mr. Carrion said.
Goldman bought Houston's Litton Loan Servicing LP late last year. Many people consider such a servicing platform to be an important tool for investing in mortgage assets, offering more control and more insight into the performance of home loans.
In June, Litton acquired the servicing rights for a $12.2 billion loan portfolio from the faltering Fremont General Corp. A spokesman for Goldman said that Litton is involved in the transaction with Popular, but he would not elaborate.
Tim Gaven, a partner at Newbold Advisors LLC, a Bethesda, Md., firm that focuses on the mortgage business, said in an interview: "It's the same old story over and over again. There are no comparables. There are no benchmarks," and bids are being determined by investor requirements for steep rates of returns.
In a follow-up e-mail, he wrote that Goldman is buying "a sausage factory of performing and nonperforming loans." However, Goldman has "the infrastructure and capability in Litton … to cure loans and/or trade them off into the scratch-and-dent market."
Dan Reiman, another partner at Newbold, said that buyer interest is being propelled by the onset of the "belief that the bottom of the market is near, or at least" that a steep decline is moderating.
But he highlighted potential risks; for example, weakened servicing operations at distressed sellers can allow loan problems to mount, and taking on more assets can strain the capacity of buyers.
"Companies who are currently holding the portfolios that are being sold — right at the time they need to increase their focus on loss mitigation and all of the issues surrounding servicing a loan — they're starting to see budgetary" pressure, "so people are being laid off," Mr. Reiman said. "So what's happening to these portfolios is they're becoming increasing screwed up."
As a result, "absolutely there may be more costs to service and costs to mitigate than is being anticipated by the company doing the acquisition," he said. "Combine that with the fact that the companies doing the acquiring, a lot of their servicing arms are already at capacity."
Espen Robak, the president of Pluris Valuation Advisors LLC, a New York firm that specializes in valuation for illiquid assets, said there is a "terribly wide range" of pricing, because of the specific nature of the package of assets, including, for instance, seniority in a bond structure.
"If you own a pool whole loans — straight mortgage assets — and you own the entire pool, then you're much less likely to get wiped out completely, of course," he said. "It's impossible to say without looking at the pool whether or not they got a good deal."
Bain Slack, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., wrote in a research note published last week that for Popular, "liquidity and not credit is our main near-term concern."
He applauded the 50% dividend reduction it announced last week, to 8 cents a share, calling it "an important step toward addressing the issue." He also wrote that he believes the branch networks in "California, Illinois, and Florida (less likely) … may be on the block; however, given the current credit cycle, we expect there are likely to be few bids."
In July, Popular said it was "fully engaged in the process of evaluating various strategic alternatives to improve the profitability" of U.S. operations. "Some of these alternatives may involve the sale of some of these operations."
