What is a loan sale and how does it work?
A loan sale happens when a bank sells its loan portfolio to another market participant. Such a transaction can be beneficial to all parties, including the lender, the borrower, and the new loan owner.
One of the most famous examples of loan sales occurred during the financial crisis of 2007-2008. Back then, frightened by uncertainty and liquidity risk, many banks resorted to selling loans to maintain stability.
Here's another example, when in September 2023, a group of banks led by Goldman Sachs Group Inc. and JPMorgan Chase & Co. began selling $4.4 billion in debt to finance GTCR's purchase of a controlling stake in the Worldpay Inc. payment system, a highly anticipated transaction in the leveraged loan market that year.
How the bank loan sale process works
The process of selling a bank loan involves several steps:
Finding a buyer
The first step in the bank loan sale process is to find a potential buyer. This could be another bank, a finance company, or an individual interested in purchasing the loan.
Valuation of the loan
The potential buyer conducts an appraisal of the loan to determine its value. The appraisal may include analyzing the borrower's credit history, current loan balance, interest rate, and other factors.
Offer and negotiation
After the loan appraisal, the buyer makes an offer to the borrower. This is where negotiations can begin on the sale price, terms of the deal, and other details.
Closing the deal
Once an agreement is reached between the borrower and the buyer, a loan sale agreement is made. This contract sets out the terms of the deal, including the sale price, terms and obligations of the parties.
Transfer of the loan
Once the deal is finalized, the buyer pays the sale amount to the borrower and the borrower transfers the rights to the loan to the buyer. The buyer becomes the new lender and continues to repay the loan according to the terms of the agreement.
It is important to note that the process of selling a bank loan can vary depending on the specific terms and requirements of the borrower and buyer.
Who can sell a loan and to whom?
A loan can be sold either by the lender itself (bank or other financial organization) or by a third party who purchases the loan for further sale. Companies that specialize in buying and selling loan portfolios are called loan agents or factoring organizations.
Generally, loan portfolios are sold to banks, financial institutions or investors.
Banks may sell loans to realize liquidity surges or to get rid of troubled assets. Financial institutions usually buy loans in order to diversify their investment portfolios and earn additional profits from interest on loans. Investors may also be interested in acquiring loan portfolios to generate a steady stream of interest income.