Morgan Stanley May Buy $700M of Signature Bank's CRE Loans

Morgan Stanley is set to buy about $700 million of the shuttered Signature Bank’s CRE loans from a group including Blackstone Inc., Canada Pension Plan Investment Board and Rialto Capital, Bloomberg reported. A large transaction raising bigger questions of what might be happening.

To try and understand what is happening, step back in time to last year. Signature Bank was one of three — the others being Silicon Valley Bank and First Republic Bank — closed by the Federal Deposit Insurance Corporation when it and other regulators became alarmed at how the institutions had not hedged the possibility of rising interest rates. Large volumes of bond assets purchased when interest rates were low under dovish monetary strategies lost significant value when the Federal Reserve started pushing rates upward to battle inflation.

The FDIC put $33 billion in Signature’s CRE loan portfolio, mostly multifamily and almost half the full value rent-stabilized or rent-controlled, up for sale in September 2023.

The Blackstone, Canada Pension Plan Investment Board, and Rialto Capital group’s bid had won a 20% stake in nearly $17 billion of the former Signature loans in December 2023. Then in January, they decided to sell that portion.

The swift turnaround might seem odd, but some analytic business speculation suggests some reasons. In November 2023, there was concern that Signature’s portfolio could sell at 15% to 40% less than their face values. A financial challenge in markets, with deep drops in transaction volumes, has been a lack of price discovery.

A sudden in and out of a large transaction typically suggests that either the buyer had already developed plans to flip at a profit, or there was something else going on. Portfolios full of affordable multifamily housing whose availability would be enforced by an ongoing joint venture with the FDIC aren’t likely to let a buyer make a level of profit that would be unbearably tempting. However, large purchases can have an impact on broader markets.

“When a big portfolio sells and sets a price for existing loans, it’s going to affect every market,” Matt Reidy, director of commercial real estate economics for Moody’s, told GlobeSt.com at the time. “There may be influences on the pricing that go beyond a pure price discovery exercise. Some of it depends on what the underlying loans and collateral were, how they were performing. The degree and extent to which it affects other markets depends on those markets.”

Sizeable purchases, if at low enough prices, can cause valuations of the asset type to drop. But at higher prices they can bulwark valuations for already held properties. As Bloomberg put it, “Owners and lenders are grappling with higher borrowing costs and plunging valuations, and the rare transactions in the market such as the Signature loan sales have brought some clarity to exactly what some properties and their debt are worth.”

Additionally, depending on the price and where Morgan Stanley projects property values will eventually land, having a lock then on properties that unprepared owners might have to turn in could become an excellent hedge.