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From Chris Mayer, chief investment strategist, Bonner & Partners: I was drinking mimosas and reading the paper at an airport bar when a story caught my eye…
“Italy reaches ‘bad bank’ agreement with Brussels,” the Financial Times reported.
“Bad bank” is one of those magic phrases that means an opportunity is afoot.
When a country’s banks have a lot of bad loans on the books, the government can create a “bad bank” that buys the bad debts of those troubled banks. It’s a sort of bailout.
Infused with fresh cash and free of troubled credits, the thinking is these other banks will start lending again. But here’s the interesting part…
The bad bank then sells the bad debts to private investors. Say there’s a mortgage on an apartment building in default. An investor can buy the mortgage from the bank and gain ownership of the property.
Investors can get some excellent deals this way. The bad bank basically runs an auction to get rid of stuff.
To see how well a buyer can do, take the example of property management firm Kennedy Wilson. It owns hotels, apartments, and office properties in Ireland, the U.K., and the U.S. It acquired these assets from banks (and bad banks) in the wake of the post-2008 Irish banking crisis.
Since 2009, the company’s generated an annual gross return of 30% on its investments. The stock has more than doubled.
I like to think of Kennedy Wilson as part of the crisis cleanup crew. That’s why I recommended it to readers in 2012.
It’s returned 93% since then… even after a 30% drop during the latest sell-off.
I remember visiting Kennedy Wilson in Dublin and standing in front of the iconic Alliance Building. This 210-unit apartment complex houses many Google employees. The web giant’s international HQ is nearby.
Kennedy Wilson bought this property from a bank at 50% below its peak value and less than what it would cost to build it.
It then fixed up the units at a cost of about $12,000 each. The spiffy new units rented for more money, and the company has earned a 30% return on every $12,000 it spent per unit.
That’s why bad banks are worth your attention.
Technically, what Italy is establishing is not a classic bad bank. Italy is offering to guarantee these debts rather than buy them outright. Nonetheless, the dynamic is the same. Italy’s banks will sell their bad debts to investors, likely at steep discounts.
And there’s a lot to sell. Italian banks have about 350 billion euros in non-performing loans—that’s 18% of all loans—on their balance sheets.
This is an exciting investment theme for the years ahead. There will be more bad banks and more bad debts. Finding ways to play that theme could lead to big returns. And Kennedy Wilson is one way in.
Reeves’ Note: Chris was a top corporate banker for a decade. He managed hundreds of millions of dollars. He had “golden handcuffs” and an executive pension… but he turned down a $950K-per-year offer from another investment bank to write his own investment newsletter. He preferred to share his expertise with Main Street, not Wall Street.
Over 10 years, Chris provided his subscribers with an average return of 28% per investment. (Some returned gains as high as 269%.) Now multimillionaire Bill Bonner—founder of Agora Inc.—is investing $5 million of his family’s trust in Chris’ recommendations. Click here to learn how to get into these positions—before Bill does.
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Recommended Link Shocking Footage From Outside the Door of Our Affiliate’s Building
You’ve got to see this… It’s footage from Baltimore, MD, right on the front doorstep of our affiliate’s headquarters. And you won’t believe what they caught this woman (named Charro) doing on camera… It’s really one of those things you HAVE to see with your OWN two eyes. Click here to see the UNCENSORED CAMERA FOOTAGE. |
