Pedestrians walk past the Bay St. entrance to Brookfield Place in Toronto’s Financial District, on July 12, 2022.Fred Lum/The Globe and Mail
Brookfield Asset Management Ltd. BAM-T has bought a US$925-million portfolio of commercial real estate loans from U.S. regional lender Valley National Bank, a deal that signals increased willingness among banks to co-exist with fast-growing private credit providers.
The loans in the pool are performing – meaning borrowers are still making payments – and span multiple property types, but do not include any office buildings. Brookfield’s credit arm bought the portfolio at a discount of about 1 per cent to the loans’ par value, and Valley will continue to service the loans for customers.
The deal, announced Tuesday, helps Valley spruce up its balance sheet as part of a stated strategy to slow the pace of growth in its loan book and better match its lending to its capital buffer.
For Brookfield, it is a chance to buy a pool of loans at a reduced rate and put capital to work from its US$30-billion real estate credit business, which is part of a rapidly expanding credit group that manages more than US$300-billion. Brookfield has built its clout in credit rapidly in recent years through its majority ownership of Oaktree Capital Management LP and its burgeoning insurance arm.
Brookfield has been lending to property owners since 2000, as a complement to its US$270-billion real estate business. But it has ramped up the expansion of its credit platform in recent years, seeking to tap into exploding demand in a market that has quickly surpassed US$2-trillion in assets, and is expected to keep expanding.
For the past year, Brookfield has been eyeing opportunities to snap up real estate assets at attractive prices – what chief executive officer Bruce Flatt sometimes calls “great assets with bad capital structures.” Pressure on the commercial real estate sector from high interest rates, combined with an increase in capital requirements and regulations imposed on banks, have put strain on property owners and their lenders alike.
At the same time, major private credit providers that had swooped in to fill a void in lending, left by banks retrenching, are now often striking partnerships with established lenders. The private credit providers are content to own most of the risk and the reward while letting bankers issue the loans and manage relationships with clients.
Valley Bank’s chair and chief executive officer, Ira Robbins, called the deal “mutually beneficial,” while Brookfield managing partner, Bill Powell, said it is “strategic for both parties,” in a statement. Brookfield expects this will be the first transaction in “a long-term partnership,” Mr. Powell said.
Last year, Brookfield and French Bank Société Générale S.A. launched a private debt fund together that aims to invest up to €10-billion ($14.75-billion) over four years. Around the same time, Apollo Global Management Inc. reached a deal with French-based BNP Paribas SA, which committed US$5-billion to fund investment grade, asset-backed deals sourced by Apollo.
For banks, the threat that private credit rivals will step in and do business directly with corporate and commercial clients is real, and the playing field is tilted because private lenders are unfettered by most of the strict regulations that govern banking. Partnerships are seen as one way to head off that threat.
“I do think that there are opportunities to work with these providers to lighten the load on our own balance sheet,” Canadian Imperial Bank of Commerce chief executive officer Victor Dodig said at a September conference hosted by Bank of Nova Scotia.
Some of the loans that CIBC issues “may belong on their balance sheet,” Mr. Dodig said of private credit lenders. “I think there are opportunities to work with them.”
Banks have reasserted themselves in parts of the credit markets, but tighter limits to their tolerance for risk mean they sometimes still need partners with balance-sheet room to spare.
“In some cases, it’s the banks who are moving back,” said Craig Noble, chief executive officer of Brookfield’s credit business, at a presentation to investors in September. “But in other cases, we’re simply partnering with bank in order to provide capital.”