Debt Funds - Who is Funding them and what is going on?
What is going on with the debt funds?
TREPP puts out a lot of great data but is only a small part of the picture. The Debt Funds and CLOs have been funding the over leverage for the last few years. What is going on with them?
- Which ones are going under? Are they in discussions to be bought out?
- What are they doing with their loans that are clearly under water? It seems to me that they haven't started tackling the multifamily problems yet and are just concentrated on Office.
- Which banks have been providing leverage to these groups and are they pulling that capital back?
- I have not been able to find great data on them? Does anyone have a good source on their portfolios?
- There should be a wave of defaults if loans covenants were being followed. Why isn't that info out there?
Just google the mortgage REITs with lots of office exposure. Their dividend yields are like 18%+ and for good reason
Somewhat off topic, but remember not too long ago when "everything was fine" with the exception of Office? Now you're hearing more and more worries about multifamily... what's next? Industrial? (see Amazon).
Mean Reversion is coming and it will be nasty.
To be fair, problem with mf is much easier to solve than office. Office is facing double crunch, rising debt services and dwindling equity interest. NO LPs would give new equity to a failing office property with negative cash flow, let alone those facing major issues with refi. MF is different. LPs will give money to de-lever. Assets are still worth saving.
Debt funds are private for a reason - they aren't required like banks, insurance companies, or public reits to disclose anything except to their investors. In the same vein, they are free to workout, restructure, hold or sell anything at any time.
Right now, with benchmarks and spreads being so wide, not all funds actually need leverage. If you are doing a 2 year construction loan at sofr +600 with a point in and out, you are already earning a 12. They don't need to lever that.
What does "earning a 12" mean?
12% return
What deals are getting done at 600 over with 100 bps in and out? Not being snotty, genuinely interested to see where the market for this is
Right now, my team is closing deals for industrial redevelopment, 2 hotel upgrade/redevelopments that are all 600 over with origination and exit fees.
This is pretty standard debt fund pricing on anything but multifamily and maybe industrial right now. Retail conventional lender pricing is like SOFR+350 or 400, so account for the debt fund premium on that.
Adding some dp here. For speculative developments without preleases, S+450 is what we quote on senior A note. S+600 is on point for mezz piece.
Another thing is that debt funds are superior to equity. Even with valuations down 25/30%, (which was peak to trough during the GFC), the debt is still good. Equity is in the position where they need to decide if they are going to invest more to hope in x years they can get out or hand back the keys now.
Basis is everything.
I say that as someone who is a debt fund that raised 2.5bn in capital this year. We are doing fine.
Edited to fix typo
The debt is subordinate/ junior to the equity but is still good? Or you mean the reverse?
Probably means equity is subornidated, ie debt is superior/senior
Why do debt funds size based on DY, whereas bank lenders care more about DSCR? Understood they're related, but my understanding is banks look at DY as in SOFR at 5 plus 300 over for 8 percent. 8 percent x 1.25 = target 10 DY. Debt funds look at market cap rates divided by LTV. So 5 cap divided by stabilized 70 percent LTV equals target DY of 7.14.
And also, secondly, wouldn’t a debt fund need to target a higher DY given their higher cost of capital?
Not a debt guy but both lenders look at DY, it's a sizing and coverage metric.
Also isn't DY just NOI/debt? In otherwords its just a coverage metric to check your basis. There's no set rule as to what your DY should be. Some lenders want more coverage, some want less.
My guess is banks look at DSCR and LTV for sizing purposes because that's how the refi market (agency, CMBS, etc.) also sizes deals. The banks are looking to refi out of construction loans, so they want to make sure the loans conform to the standards for a viable takeout.
Debt yield correlates to return at NOI for the fund, DSCR relates to the mortgagor or lender being paid via adequate coverage to satisfy debt. It just depends on POV. Important to note, cap rates do not include debt and typically capex payments (outside regular R&M), and most lines which are floating have mandatory interest rate caps pledged to the lender to protect from interest rate increases causing an inability to pay. It's usually struck where the dscr would fail assuming underwritten expenses are met.
They both look at each metric. Usually debt yield is a covenant for certain types of real estate, too. Hope that helps
If you don't see going-in loan stips being priced in DSCR you will SOON. DY isn't really indicative of loan health in a rising interest rate environment.
Trying to add my 0.02..
Banks scale based on dscr (especially investment banks) as they are looking to syndicate the risk to Rating driven investors insurance funds. Rating is driven by dscr
Bank source of capital is deposits (which are sofr linked) and they tend to hold 10-50%of capital against the debt they make (I.e. they are 2x-10x levered and is dependent on the loan rating). So issuing at S+250-350bps (credit spread is the only thing that matters), you see that you have becomes 5-25% ROE.
Debt funds use traditional alternatives pool of capital (endowments etc etc), so would guess on direct lending senior debt, you would look to charge a premium compared to bank debt, but offer better covenants.. 10% ish IRR is usually target cost of funding = hurdle rate. Risk profile is completely different, 2-3 year WAL vs PE, risk has clear exits as opposed to PE
DY, DSCR and LTV/LTC should all be singing the same hymnal. A prudent lender should be using all three metrics with loan sizing and explain at the onset that they are looking at all three and should tell you what those targets are in your 1st call to a lender. From there, you as the sponsor should be able to run the numbers in your model to see if your project is feasible and that the assumptions are reasonable and supported. If a project goes sideways, no lender will accept responsibility, so it's very important you run the numbers yourself. Otherwise, the lender will essentially shift the burden to you to cure any cash flow/LTV deficiency. NOT EVERY LENDER/REPRESENTATIVE IS CREATED EQUAL...so arm yourself with the right investment team, business plan and financial model(s). Be prepared to interview them just like they're quizzing you about your project.
Just my $0.02 as a former banker.
Thanks for your thoughtful reply!
Another helpful way to look at it is to compare DY to cap rates. If a debt fund writes a loan with a DY of 8% on a property that trades at 5% cap rate, they're going to feel better about selling off the asset if they ever have to take it back. It indicates a good basis of value relative to the market.
2 reasons:
* Offshore investors use them as blocker entities to avoid UBTI.
* For mortgage reits to avoid owning a converted debt asset and triggering excess taxes because they are engaging in business outside of their normal course
mrcheese321 - Thanks for you reply! I fully agree with you that there are some debt funds that were not as risky and better managed. Some even didn't have debt, which is a much safer place. The fact that you all raised $2.5B last year is incredible!
What I am asking about are the debt funds that are not as well managed.
- Over levered loans
- Bad Sponsors
- Leverage on the fund
- Poor allocations in the portfolio
- Etc.
Most deals that did leverage on Loan to Cost since 2021 (at least in multifamily) are underwater. On top of that, a lot of these sponsors layered on pref equity (mez debt) on top of a highly levered senior loan. Realistically, values are down 30%+ and i think if there were a lot of transactions going, it would be closer to 50% below peak.
- So what do these debt funds do (not referring to yours but the ones matching the criteria above) when they have a loan that is 20%+ under water, and the sponsor is broke and on the verge of declaring bankruptcy?
- There are a lot of sponsors that are out there that are over levered on dozens of deals if not their entire portfolio. They are not going to be able to right the ship and are looking at multi year lawsuits.
- I don't think that the debt funds works those deals out and i think that comprises tens of billions if not over $100B in loans.
-So what are the debt funds doing in those situations?
- Are they dealing with it?
- Are their investors being patient?
- Are their bank lines of credit getting called in?
- Who are the banks lending to them and how much exposure does the bank industry have to these debt funds?
If people have insight into this, your feedback would be greatly appreciated.
Not every debt fund deal was done In Phoenix. Sure there are spots that are down tremendously, and some syndicators that are running out of money, but portfolio wide we actually have observed folks paying off sooner than anticipated to get out of the 9% loan.
So it is going to depend a lot how you finance your book. Did you do cross collateralized, cross defaulted warehouse lines or LOL? Did you actually do a CLO or CMBS securitization or are you holding everything on your balance sheet?
Lenders have a whole lot of options to workout loans. It is just going to depend on what their book looks like and their view of the property. Plus their financing options
It is also going to depend what the sponsor is bringing to the table. Are they just an operator and don't have any cash, then lenders are going to be more apt to take back the keys.
Depending on how they financed, it is very likely they have a "ride along" which allows for the conversion of a LOL or NON into a mortgage. So the lender now becomes equity at the lending basis without needing to find new financing.
Also realize that loss given default is generally modeled as between 2-4% of OPB.
It is highly unlikely that your entire portfolio defaults at the same time, so you can generally use cash flow from the other loans to iron our defaulted loans.
It is really hard to discuss this in a vacuum because it very much depends on the situation.
But during the early part of COVID, when TPG and Granite Pointe needed money, there were plenty of investment shops that provided them with additional (expensive) capital to help they stabilize. It will be the same thing this time around assuming the books for these companies are at least decent.
Thanks for your comments and experience. I think that defaulting loans will be 30% or 40% of their books with lots of weak sponsors.
In the last recession i was at a lender. One thing i noticed is they had no clue what to do once defaults moved past 3%. It was just too much volume for them to handle and they didn't have anyone to handle the issues.
Covid didn't have a 500 bp increase in the fed funds rate. Everything froze up for a few months but then quickly returned. People were panicked for a while, but that quickly went away. This is a multi year problem with values dropping 30% so far and will likely drop 50%. Office has dropped much more than that.
For sure some will work things out but we haven't seen much of that so far. Arbor took a hit in Houston. MF-1 took a hit in LA.
Some malls are getting sold at losses. The equity and lenders in San Francisco is getting crushed. I have seen some extensions on office properties and some on malls.
You are conflating a lot of concepts, as the folks in the debt fund space aren’t typically doing malls, for example. There will be defaults, but it won’t be 30-40% of their book
How did MF1 take a hit in LA other than a cut on the interest rate?
MF-1 cut its principal balance when the new equity came in.
What kind of lender were you at? All of the debt funds I know of have internal AM of some sort to handle defaults/workouts. It might not be a big team, but they have the skillset.
In terms of 30-40% defaults. If you have a 1bn portfolio. 350mm defaults and you have a 3% loss given default, that is roughly a 10mm crystalized loss. But that also means that your 650mm in good standing, producing a 9% return paid you 59mm in a year. You can absorb a 10mm loss easily.
Yes it will take time, but if you structured it correctly, then it isn't a problem.
The other thing to think about is that just because values are down 30% right now, doesn't mean that a lender absolutely has to crystalize that loss. They can feed the asset for 5 years and then sell if the projected return looks good enough. Or worse case scenario they hand the keys back to their own lender and cut bait.
It is very likely that Arbor had some sort of back leverage on the deal in Houston. So if the deal was 100mm, 70% debt, with 70% back leverage, Arbors spot is actually 49mm-70mm on the stack. If they have to crystalize the full 21mm loss (e.g. 0 recovery), they will just use the rest of their book to absorb it.
I was at a mid-tier national bank. I think they had $50B in assets at the time. Not the biggest but similar to most other large banks. They had a servicing department (they all do), but they were mostly debt collectors. The nuances of restructuring a loan was lost on them.
There are lots of other things to consider. If the debt is 20% or 30% under water, the loss won't be $10mm. Also with all of the values coming down they will now have extremely high exposure on their book and potentially under water on their portfolio. If they are at all levered, their loan will be called in. If their exposure is that high, they might be violating their investor covenants, which can trigger negative actions by the investors.
Cheap money from debt funds (I am not saying this is your fund) was a huge part of the problem that led to absurdly high valuations. The valuations are now coming down and the debt funds are exposed. I wouldn't be shocked if some debt funds violated their investor covenants when they were funding deals, which will open them up to litigation.
Interest rates tripling is a massive problem for the equity and debt markets. Virtually all equity and lenders with variable rate exposure are at risk.
You seem like you are well versed in these matters and know the math is pretty simple. Deals were hitting 2.25% cap rates at the height of the market. I know of a class A office product in Manhattan that traded sub 2%. Right now cap rates range between 4.5% and 6%. I think they are going to 6% to 8%. You cannot have cap rates change like that and not have a massive problem for anyone with exposure in the short term. Short term equity, pref, and loans all have exposure.
Banks have a lot of different considerations than debt funds. The way they act vs. a fund should and will be different. Most banks with issues, see HSBC and PWB most recently, and DB during COVID, simply sell their loans to other lenders if they need to get something off their books. Debt funds have a lot more flexibility to actually work out things in their portfolio and most are very prepared to own assets if they have to.
You are confusing a couple of different concepts here when speaking about losses and the potential issues. You are essentially assuming that a lender has to sell immediately after getting back the keys. They can, but they don't have to.
I'll use an example to help.
100mm property. 70mm loan/30mm equity
That 100mm property is now down 50% in value because of cap rates changes (but that also assumes the NOI is stable).
The debt is impaired at, being worth 50mm vs a 70mm note. If the lender sold right now, then they would only get 71% of their money back (50/70). But that lender doesn't actually have to sell the property right now, they can wait.
So they feed the asset for the next 2 years, values recover and it is now worth 70mm. They sell at this point and recover 100% of the money.
1) a point in time impairment does not dictate the crystalized loss to investors. Loss given default of 2-4% is what economists predict is the actual realized loss factor on a book of loans.
2) peak to trough during the GFC, values dropped a maximum of about 30%. Saying that this next recession is going to be bigger and worse than that on the whole of the market, is slightly insane. Are there going to be winners and losers, of course, but the entirety of the market is not going to crash that fast or hard. It would literally kill the economy. Commercial RE loans are a 6tn market. If all lenders had to crystalize a 20% loss, or 1.2tn, the entire US economy would collapse.
Also to you comment about lawsuits. Unless you were taking risks that were unexplained or going against your investment docs, there won't be any lawsuits for losses. You can't just sue a company because you lost money, that is capitalism.
I head asset management for a debt fund, so I manage a multi bn book and handle workout scenarios for my fund. We have 2 or 3 deals that we are watching closely in my book and we've done all of the projections and have game plans if any of those borrowers were to default. Unless we are wildly wrong, we are not expecting any losses over the long term (i.e. we are stable and prepared to support assets if we need to until recovery occurs).
Wonderful response. To add or slightly play devils advocate: what happens in the scenario where valuations are 50% lower in reality? The value of the SVB treasuries were basically a similar comparison, and they were wiped of all equity nearly over night. Wouldn’t a loan where the asset is 50% less, and equity is now 20% underwater, force the fund to sell the entire fund (or loan portfolio) to keep cash on hand to keep the train rolling, instead of sit on the loan?
Color me naive on the debt side vs equity, so appreciate all of your insight so far 👍🏼
SVB was mostly invested in long term fixed treasuries and did not diversify. Debt Funds usually are short term floating rate and spread their investment over many different credits.
Where we will see weakness is focused funds. The reits/mortgage reits that specialized in hospitality, office or retail.
Again though, I'm not a commodity lender. We only do deals where we have high conviction in the business plan.
Banks and life companies are usually a bit more commodity style lenders. They have a lot of money to put out, but cover themselves mostly by doing lower leveraged, stable deals.
I 100% agree banks are not debt funds. The same is true for CLOs, CMBS, agencies, and insurance. All have different considerations.
I also agree debt funds probably have the most latitude when dealing with issues. That being said, debt funds and CLOs were clearly the most aggressive. They were lending on future values in a low cap rate market. They are by far and away the most exposed and have the most to lose. Debt funds and CLOs will respond differently but they were taking a similar amount of risk.
I had debt funds offer me 85% of cost at a low interest rate. I didn’t do those deals because if there were any hiccups, I wouldn’t be able to cover the mortgage even at a low interest rate. Lots did though. In fact most were at or well above 70% of costs, which in the value add market was close to 100% of purchase price.
I am not saying your shop did that and I sincerely hope your book is in good shape.
Debt funds can restructure but I haven’t seen them lowering anyone’s interest rates or cutting their principal balance in half. Debt funds still have a cost of capital and now it is probably 8%+. For debt funds to avoid a massive wave of defaults they would need to cut all of the interest rates below 5% and extend their loans out 4 years.
Levered debt funds have much less flexibility in how to deal with issues.
Some might be able to do that but it all seems unlikely. I find it much more likely that their investors demand they liquidate.
You can file a lawsuit against an entity for anything. It doesn’t mean they will win. It does take time and resources to combat lawsuits. When debt funds start losing money, it is a guarantee that investors will start filing lawsuits.
debt funds and CLOs getting wiped out will effect the market but it is not a systemic risk to the economy. Banks lent on actual dscr and took lower leverage positions. They have some exposure on office and retail but I think their potential losses in that sector are mitigated by other banks swallowing them up and the fdic backing the deposits.
companies failing is also part of capitalism. Debt funds and clos are massively exposed to the pricing reset right now. It was a group effort to over inflate the market and create a massive bubble but debt funds and CLOs are at the heart of it. So are aggressive sponsors and pref equity (mez).
Fortunately for the stability of the market, the banks and more regulated entities were dscr constrained when lending over the last decade.
Another important note is that deals that going to survive, are not going to stay around paying 9%. They will split the moment their rate caps expire. You have to be desperate to pay 9%. So the deals with lower leverage will be jumping ship at debt funds and CLOs and that will increase the concentration of upside down deals at debt funds and CLOs.
The death spiral on short term variable rate deals started the moment the fed started fighting inflation. The market won't be surprised if they raise the fed funds rate another 50 bps this year. I heard a former fed governor say the other day that they needed to raise it another 100 to 200 bps to really fight inflation.
Short term deals purchased at sub 5 caps cannot survive paying 9% interest rates.
This is mostly going to come down to portfolio construction and sponsor liquidity. Not every deal is a 85% LTC deal. Most funds are very strategic in when they do high risk deals and don't do it for their entire book.
Sponsors will pick and choose assets to support and debt funds will do the same thing. If they are levered, they are making the exact same decision the equity made in trying to decide if it is worth it for them to try and save a project. And they are using their investor dollars/callable commitments the same way.
I guess I don't really understand your position. It seems to be that Debt Funds and CLOs are about to disappear, but for that to happen a ton of equity funds/Sponsors have to disappear first. I'm not sure how you could say that wouldn't then translate to a collapse of the economy?
Further, not ever multi deal in 2021 is doomed. I have 4 in my portfolio that delivered early 2023 and have leased up 5x faster at rents 40% higher than originally underwritten. That deal is going to be totally fine.
CLOs I can understand more than real estate, that dry powder waiting to gobble up scraps. Real Estate is so diversified not just by fund and asset type, but even to the point that most who do read appraisals knows the economy section of the appropriate MSA makes you wanna put your head into a wall sometimes.
I don't think it's easy street by any means and workouts are gonna suck, but damn I'd be focusing more on tertiary market reits or how horrendously back dated FEMA flood maps are...
Bump
Rate caps are going to expire and it might make more sense to hand back the keys than to renew the cap or to rebalance the loan for fixed rate financing. It will be nearly impossible for 2021-2022 investors to recovery any equity without a historic spike in values.
Case in point was posted by CRE Analyst on LinkedIn showing DBRS per-sale report analysis for Blackstone SASB BX 2021-21M Mortgage Trust. BX has a rate cap renewal on a $968MM loan in October 2023 with a current cap cost estimated at $27.5MM per year.
The problem is that the estimated combined property value equates to 105% LTV or $922MM, a $46MM loan impairment (5% of OPB). Their equity is long gone and they will need to pay the $27.5MM rate cap to kick the can down the road. Add that to the current loan balance of $968MM and they are $73.62MM under water with a new breakeven loan cost of $996MM. BX will need the value to increase by $73.6MM in the next 12 month before they can recover their first dollar of initial equity.
At 75% LTV on the DBRS value, the total new loan would be $692MM requiring over $276MM cash in.
Agreed that equity valuations are impaired and that sponsors have to decide if they want to support. But at a 5% impairment to the lender, they have a much shorter way to go to recover their investment. That also doesn't take into consideration payments made over the last 2 years. 1.1bn (average because of paydown) at a 4% interest rate (same ballpark average) is 44mm a year in interest payments. Add in a 50bps origination fee and the lender still made money. Yes the irr sucks, but they still made money. This is what I'm talking about when I say that loss given default for lenders is typically so low.
It will be rough sledding but there probably isn't a wave of debt fund/CLO blow ups coming. It is more likely that they will raise/recycle capital for the recovery cycle than disappear.
CRE investors that pursued a high-leverage floating rate opportunistic strategy over the last few years are screwed with no realistic way to recover their equity but not their lenders who will have a manageable cost basis on most of their collateral.
Overall for lenders, their strength/weakness is a matter of degrees depending on loan portfolio characteristics. If these lenders priced their credit risk correct, then their return on capital should offset impairments and they will still be around to lend another day. As far as I know, most bridge/value-add lenders were not loading up on office loans which were mostly financed with long term debt before the Pandemic. So it is very unlikely that any debt fund is weighed down by office loan impairment.
Sure, good loans will be converted to fixed rate perm debt and drop out of debt fund portfolios and new loans on current market valuations could dilute the effect of "at risk" loans on fund performance. But, there is not much demand for debt fund money to generate new loans for them so recycled/new capital could become idle cash which dilutes returns.
Debt Fund and CLOs were much more aggressive (in general) than CMBS or pretty much any other major lending platform. Their loss exposure is much, much higher. Values are still dropping and will continue to drop until the capital markets stabilize. We are probably looking at 2 to 4 years before capital stabilizes.
We should expect any group with high LTVs and short term variable rate exposure to get hit. Debt, pref, and common will all take the hit.
The large sale of the signature bank loans being orchestrated by Newmark will probably lead the pack with values plummeting further. Some will make it out of this but the main contributors in the run up of pricing the last three years will mostly get wiped out.
You are already seeing major funds such as Blackstone and Brookfield give back the keys. The lenders on those deals will not be made whole. Big investment funds are not stepping up to the plate to back their investments. There is no reason to expect the little groups to step up and back an investment.
There is a deal out in Houston right now, with a $65mm loan on it. It is owned by Appleway, the same dude that had the four Arbor foreclosures in Houston. His platform and business plan is identical to lots of start up sponsors. If that loan doesn't get at least a $20mm haircut when it sells, i will be shocked.
You seem to think that lenders have to sell an asset as soon as they foreclose and crystalize losses. That simply isn't true.
Will there be some pain here and there, of course. Lenders wouldn't be efficient frontier investing if they didn't see some defaults in their books during stress.
But any lender worth a damn, and especially debt funds in general, have mitigated against the issues. Whether it be how they lever their book, access to callable capital or just being able to buy time and waiting.
You also seem to be neglecting the various ways that debt funds make money outside just collecting interest payments. Cash basis and OPB are two different things.
It depends on the lender and what they are required to do. The vast majority of lenders need to mark to market.
I assume most debt funds don't need to do that, but when the money stops they are still going to have bills. Debt funds that are levered, likely need to report values to their creditors. Debt funds and CLOs have been extremely aggressive and their books are likely underwater at this point. It is just going to get worse. It is unlikely they are allowed to hide the fact to their investors that their portfolio are being devalued.
It seems what you are reading and seeing and what I am reading and seeing are different. We can wait and see what happens.
The point of this thread was to gain insight into what is happening in the market in the debt funds and clos. Also, which banks are exposed to debt funds. I don't think the banks will lose money on their lines of credit but they may have a delay in the return of capital once the loans are called in.
Mark to market is just paper losses, not actual crystalized cash losses. Most funds do have to mark, but the vehicles are also usually closed end and non-redeemable so LPs are along for the ride, they don't get to dictate divestment decisions.
Also, as someone who actually works at a debt fund, I've been trying to tell you that things are currently manageable (which others have also echoed), but you seem to have already made up your mind that they are all in trouble and are going to collapse. From your list, more than half of them are mostly core lenders with very little debt fund type deal exposure.
If anyone can help with the point of this thread, it would be greatly appreciated:
What is going on with the debt funds and clos?
- Which ones are going under? Are they in discussions to be bought out?
- What are they doing with their loans that are clearly under water? It seems to me that they haven't started tackling the multifamily problems yet and are just concentrated on Office.
- Which banks have been providing leverage to these groups and are they pulling that capital back?
- I have not been able to find great data on them? Does anyone have a good source on their portfolios?
- There should be a wave of defaults if loans covenants were being followed. Why isn't that info out there?
From what I have seen Arbor, MF-1, and ReadyCap all have extremely risky portfolios. I have a little insight on specific loans and Arbor didn't require caps, so those are going to blead out first.
What is happening with:
I am sure there are scores of others. Please add to the list. Any info that can be provided would be great.
In originations at one of the top three you listed… we still have a strong balance sheet first and foremost. Obviously, there are some problem areas where originators really wanted to push the envelope end of 21 and into 22. Our credit guys were smarter than most though and began increasing the difficulty of our stress tests - making sure the deals exit even after a large increase in rates. Luckily, even with the deals that are in trouble, we have a great asset management team that does a nice job of working with the property managers to not be in a position to give the keys back. Arbor and readycap may not be so lucky…
Areal has a lot of office risk on its book and some lenders are selling loans but nobody appears to be underwater. Most of these funds can absorb having to repay their senior on a couple of loans. Also work outs take a long time, most debt funds will let a deal play out for awhile before actually foreclosing. If your trying to figure out a sourcing strategy it will be easier to find sponsors in trouble and see who their lenders are.
Appreciate the sharing on this thread. Real insightful
So DB is projecting issues for banks in lower quality properties (duh) because that is how flight to quality during downturns work. And that means that all debt funds are going to collapse?
All debt funds - I doubt it. However debt funds and CLOs have the highest levered deals in the market. If banks are in trouble, debt funds will get hit first.
however regulations on debt funds and banks are very different, so their issues will evolve differently.
Has anyone had success leveraging up with an A-note with PACE in the cap stack? Please dm me if so.
Former banker here. Lenders that play well with C-PACE are state specific. As an aside, I would be very prudent with how you use CPACE. Generally speaking, those that treat CPACE like "quasi-mezz debt" have run into problems with loan sizing at lenders. I'd suggest you have a compelling business plan and substantial track record and justification for using CPACE before you spin your wheels finding a lender to play nice w/CPACE - no need to jam a square peg in a round hole. Feel free to DM me if you don't find any solutions in WSO threads/users.
Doing a $125mm 75% LTC loan with a $80mm CPACE “a-note” as we speak. This is the right way to look at it. s+475 all in pricing. No CPACE interest rate arbitrage.
And for those who doubt the $80mm… with the right CPACE + senior lender you can work the LTC way above 25% LTV that you see in most legislation. Most CPACE shops are just lazy / take a shot gun approach.
SME Capital Ventures is taking back a seven story building in Soho.
Did SME do a bunch of mez/pre deals?
Handful of debt funds like mine have separate accounts with insurance companies. Originate whole loan, A note at S+250 that goes to insurance and B note at x to debt fund
I assume the a note is in a second lost position and the b note is in a first slot position.
What rights did the insurance companies have if the loan is not performing? Are any of the loans pooled together? Can the insurance company call their capital?
In essence it seems like this is functioning like leverage on the note.
This is helpful. Thanks!!
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