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Fire Sale America

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BROOKLYN, N.Y. — An executive from a fund that buys “distressed assets” held a luncheon audience spellbound Monday as he talked about what his firm thinks assets such as consumer debt are really worth.

The holders of delinquent credit card debt are valuing the paper at about 14 cents to 15 cents on the dollar on their books, and they are willing to sell the debt for 2 cents to 5 cents on the dollar, Timothy Clark, a senior partner at CarVal Investors, Minneapolis, said at an insurance industry conference organized by Standard & Poor’s, New York.

CarVal invests mainly in commercial real estate loans, single-family mortgages, business loans and consumer debt. For CarVal, even if the credit card paper prices go down to 2 cents on the dollar, “that may be too much,” Clark said.

Some in the insurance industry and elsewhere have been looking for “green shoots” – evidence that parts of the economy are starting to recover.

“I’m kind of green shooted out,” Clark said. “We do believe that there’s future pain yet to come.”

The government has stabilized the financial markets, but government debt is high, and first-quarter corporate earnings were terrible, Clark said.

Because the U.S. population is aging, Americans need to increase their savings rate to about 8%, from 1.8%, over the next decade simply to fund their retirement. That alone could cut U.S. consumer spending about $800 billion per year, Clark said.

Some banks seem to be continuing to value assets at inflated levels, Clark added. In many cases, he said, CarVal is willing to pay just 50 cents to 70 cents on the dollar for assets, and the banks are still valuing the assets at 65 cents to 85 cents on the dollar.

Over in the commercial real estate sector, prices already are down 35% to 45% in many markets, and vacancy rates are approaching the levels last seen in the early 1990s. Meanwhile, commercial real estate borrowers will need to refinance about $600 billion in debt that is set to come due in the next 24 months, Clark said.

When the debt comes due, that that will depress commercial real estate prices even more, Clark said.

But CarVal sees attractive opportunities in commercial real estate, and it is having good luck with attracting tenants, possibly because the tenants that can afford to sign leases are looking for building owners that seem to be stable enough to survive, Clark said.

Providing debtor-in-possession financing for small and midsize companies that are going through bankruptcy reorganization should be another growth opportunity, because some of the major competitors in that market have pulled out, Clark said.

Thanks to the lack of competition, “we can cut quite a good deal with a bankruptcy court,” Clark said.

Clark also sees opportunities for investors and lenders that own single-family mortgages to keep borrowers in their homes.

CarVal has been pressing its servicers to cut principal to 70 cents on the dollar for as many mortgage borrowers as possible, to keep the families in homes and avoid the costs associated with maintaining an empty, lender-owned house, Clark said.

The value of the typical troubled mortgage “is never going back to par,” Clark said. “Let 70 cents be the new par.”

But CarVal has found that even servicers that are being pressed to give up principal balance have trouble forcing themselves to do so.

When the servicers fail to adjust the principal balance, “that’s a lost opportunity,” Clark said.


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