The settlement market first felt the impact of the credit crunch last fall, as providers purchasing off lines of credit found themselves at the mercy of committees that suddenly, and for the first time, needed to intimately understand the transactions for which they were approving funds.
Predictably, closings slowed while buyers thoroughly scrutinized each presumed acquisition during the final funding and escrow reviews. This due diligence stall eventually eased and closing times improved in the months that followed.
Still, the credit fears remain and continue to impact the funding side, albeit earlier in the process. As is the case with many transactions, funding institutions have become very conservative in their lending practices and are not only reticent to extend credit, but are concurrently increasing collateral requirements on outstanding commitments.
In early March, the Federal Reserve attempted to stimulate the markets and improve liquidity by introducing the latest in a series of rate cuts dating back to mid-September. But investors and lenders remained skittish, prompting the central bank to take unprecedented action on March 12 by offering to lend $200 billion in Treasury securities to the largest investment banks. Stocks responded with their biggest one-day rally in 5 years, yet later that week the markets were pummeled again as plans to alleviate liquidity problems at Bear Stearns left many wondering exactly how much additional bad news was to follow.
What does this mean for the settlement market?
The investment banks are exhibiting unprecedented selectivity regarding what they will add to their portfolios. We believe this is evidenced by the fact that several normally prolific buyers appear to be sitting on the sidelines, while other, previously less active buyers are winning auctions.
Some observers say this hyper-selectivity may be indicative of a change in the relationship between providers and funding entities. Traditionally, a buyer would establish criteria and arrange access to funding and the provider would continually fill the tranche within the established parameters. Under this arrangement, the providers were able to build a margin into the offer which would allow room to honor a commitment for relationship reasons, even if the yield expectations had moved against the buyer. Today, there is less room in the offer for pricing concessions, and there is no incentive to book potentially unprofitable trades.
How to react, or why sometimes the best defense is a good offense
In times of uncertainty, it pays to offer clarity wherever possible. In this case, make sure participants take a “macro view,” and recognize the current difficult climate as a credit market problem, not a life settlement asset class problem.
In general, brokers need to be proactive and let agents and advisors know the credit environment is materially impacting settlement funding. In particular, these transactions will continue to serve clients well, if emphasis is placed on the right areas:
o Faster is better. As a result of market volatility, the time between offer and close has become more critical. An anticipated yield is calculated at a certain level when a bid is extended, but may change by the time documents are returned, due diligence completed and the trade is actually booked. We have seen an increase in providers withdrawing accepted offers during closing and believe this is because the return assumptions have changed materially between the formal offer and anticipated close. The model implemented by a dominant European funding entity, six-week close or risk of a re-pricing, is probably the norm, whether explicitly stated or not.
o Get everyone to the table early and sweat the details. Brokers need to inquire whether other advisors must be brought into the decision-making process before the offer letter goes out. It also pays to offer help with transaction analysis.
o Recognize seller psychology for what it is. Understand that a seller–any seller–is often reluctant to be pushed into a decision. This means the process must start earlier. Producers should keep the client informed of the sale’s progress, ensuring that the final offer is not the first time the client considers the transaction.
A true consultative relationship with the producer can significantly improve efficiencies, as defined by average number of days to offer acceptance. Providers work to win the right to have an offer presented to the client. Brokers need to work just as hard to coordinate its timely acceptance by maintaining communications with both the viator’s advisor and the provider.
This approach has value in today’s environment. We can’t control the credit markets, but we can control the level of service and communication we offer our peers.
Cynthia Poveda is executive vice president of Life Settlement Insights (LSI), a Cleveland based settlement broker, and President of Arbor Court Capital, a FINRA broker-dealer and wholly-owned subsidiary of LSI. She can be reached at