(Bloomberg) -- US regional banks and finance companies are increasingly selling off their consumer loans as funding them gets harder and more expensive, flooding private credit firms and hedge funds with requests to buy the debt at a discount.
Firms like Canyon Partners, Castlelake and Hyland Hill are seeing twice as many loans for sale now as at the end of last year, according to people with knowledge of the matter. The loans coming across their desks include car debt and personal loans, from consumer lenders including LendingPoint, Best Egg and Upstart Holdings Inc., as well as regional banks, the people said.
As finance companies and regional banks lose appetite for making consumer loans, hedge funds and other investors may end up with more opportunities to profit. But consumers will probably end up paying more for financing, said Dan Zwirn, chief executive officer at Arena Investors, which looks at consumer debt.
"Consumer lenders are just getting charged more as their cost of financing goes up," Zwirn said. "This leads either to higher rates for consumers or decreased availability of financing for those who have already been paying the highest rates."
Regional Banks
Regional banks used to be among the biggest buyers of consumer debt, but are now increasingly selling the loans to clear their balance sheets and cut their capital requirements, said the people who declined to be identified as the details are private. PacWest Bancorp said this week that it sold a $3.5 billion loan portfolio including consumer loans and timeshare receivables to Ares Management Corp.
Funding costs are rising for lenders after the collapse of firms like Silicon Valley Bank have spurred consumers and companies to pull money out of smaller banks and pour it into higher-yielding instruments like money market funds. Deposits are a key source of funding at these banks, which often focus much of their lending on consumers and small businesses.
For US banks below the top 25, deposits shrank by more than $215 billion between the end of December and mid-June, on a seasonally adjusted basis, according to data from the Federal Reserve.
Packaging loans into bonds and selling them to investors is also growing more expensive. The average asset backed security yielded 5.5% on Thursday, close to their highest level since the financial crisis, compared with 1.13% at the end of 2021, according to Bloomberg index data.
And for some lenders, borrowing costs have risen even more. Asset backed securities sold in 2020, supported by personal loans, yielded a little over 2.5% over the benchmark at the time. A similar part of a deal done in April yielded 7.7%, according to data compiled by Bloomberg.
"The number of transactions we are seeing from consumer lenders has doubled since the end of 2022," said Chris Giles, head of household investments at private credit firm Hyland Hill, in an interview. "Some of these originators have lost buyers or access to securitization financing in recent months and need to sell their portfolios to keep their businesses going."
Many investors are holding back on buying until potential returns rise, Giles said. Often portfolios are being offered at somewhere close to 97 to 99 cents on the dollar, just below the original prices of the debt, according to investors who have seen offerings.
In an emailed statement, LendingPoint's CEO, Tom Burnside, said in the last four months the company has sold asset backed securities and has also arranged more than $1 billion in financing deals with private credit shops, among other financings, and has long sought diverse funding methods to help it get better execution. A representative for Best Egg said that the company regularly securitizes its unsecured loans, while also selling them to asset managers, and that it hasn't changed anything in that regard. An Upstart spokesperson declined to comment.
Getting Out
Some US banks are even selling loans they previously bought, according to Atalaya Capital Management, a hedge fund that buys consumer debt.
"It's a lot of the smaller banks that you have never heard of that have been buying these assets at the lowest return profile," said Atalaya partner David Aidi, in an interview. "And some of these banks are waking up today and saying 'we're going to get out of these.'"
Buying loans now involves taking risk. A report on Friday showed US consumer spending stagnated in May. The excess savings that consumers built up during the pandemic, thanks to stimulus packages, won't last forever.
"We are seeing a lot of supply now and expect it to continue, so we can be picky about what we buy and curate the portfolios of loans we are willing to take on," said Todd Lemkin, chief investment officer at Canyon Partners.
Investors are seizing opportunities. KKR & Co. agreed last week to buy as much as much as €40 billion ($44 billion) of buy-now-pay-later loan receivables from PayPal Holdings Inc. in a deal that frees up the payments giant to do more share repurchases.
Private debt firm Castlelake agreed last month to buy as much as $4 billion of installment loans from online lender Upstart Holdings Inc.
Read more: Private Credit Firms Are Muscling Into ABS and Consumer Lending
And Apollo Global Management Inc.-backed Atlas SP is teaming up with Angelo Gordon and Varde Partners — in partnership with Pagaya Technologies — to buy a pool of consumer loans from a US credit union to raise liquidity amid banking-sector turmoil.
"There's a wave of loan sales coming to the market," said Isaiah Toback, partner and deputy co-chief investment officer at Castlelake, in an interview. "We are selectively but aggressively deploying capital," he said, referring to buying the higher quality loans that consumer lenders are making now.
--With assistance from Max Reyes.
(Updates with graphic and headline links. An earlier version corrected to remove incorrect chart, description of firms in paragraph two and erroneous stray word in first paragraph.)
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