Has anyone here worked on note-on-note financing? Please share how you’d evaluate and underwrite a deal. Legal structure aside, is it fundamentally similar to providing repo financing, where you advance X% against a loan?
I imagine the overall collateral/market/etc. analysis is the same as if you were making a loan directly.
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Following, curious as well
I'm taking a guess at this, as I have not worked on structuring these, but I'd assume it is similar. Although probably more flexible structure than repo since it is a one-off transaction, instead of set parameters with a repo facility.
The analysis is the same as making a regular loan. Think about it as making a low leverage loan.
As mrcheese said, the analysis is the same as making a regular loan. However, your question was about structuring. In a REPO, there is a more "movement" lets say. In a note-on-note financing there is really just a loan being made from lender A to lender B using lender B's loan as collateral. It also depends on what kind of REPO you're talking about. In real estate, the most common REPOs are the ones provided as sort of a warehouse LOC/ABL for a securitizer to build up a portfolio of loans, before an offering. A very conservative bank, like US Bank, will offer cash to someone executing CMBS transactions. These non-securitized loans are sitting on the CMBS issuer's BS inside an SPE. Using a third party, US Bank will sort of take possession of that SPE for the duration of the REPO (unlike in a true bank treasury REPO where the securities actually swap hands). In a note-on-note, none of that is going on.
Thanks; very helpful.
Bump. How does note on note financing improve the original lenders yield?
It levers the original lenders investment
They are effectively getting debt at a cheaper rate than what they are selling it at. Let’s say they have a 75% LTV loan at 500 over and get 3 turns (75% of their loan) of debt at 200 over.
In short, they are making 800 bps on part of their loan.
banks classify loan-on-loan as C&I as opposed to real estate, so I am told they really like it in this day and age because they can essentially make loans on real estate without calling it that
some other stuff to think about if you are the loan-on-loan borrower:
do you have enough term on your loan-on-loan beyond your borrower's term if borrower doesn't make his maturity payment, you have to foreclose, you get dragged through bankruptcy court, and so on
or do you have enough cash to make your loan-on-loan lender go away in that scenario
and do you have enough cash to make monthly payments to your loan-on-loan lender if your borrower stops paying you
BOOM
So in a note-on-note (A/B) deal, if a $10MM bridge loan is originated and fully funded by Lender A, and then Lender B comes along and offers to take $5MM of the $10MM as an A-note, the collateral for Lender B is the $10MM loan, correct? vs collateral being the property itself.
Assuming the $10MM has a personal guarantee/recourse from the borrower, does the A-note lender have the ability to get any sort of additional recourse from the B-note lender?
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