I am working on an acquisition transaction where there will be zero cash flow in year 1. However, at loan closing, there will be a lease signed to a tenant for 30 years, so extending well beyond the loan term. The tenant is solid and I believe the sponsor will use year 1 to use some of the proceeds towards renovations, TI's free rent so that the space can get ready for the tenant. It seems like a bridge to perm deal but can this be a CMBS execution? How will rating agencies look at this? I am thinking a 25% haircut to total rental income? How would you structure holdbacks or reserves? Any help or guidance is appreciated! Thank you.
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so the issue is that the sponsor doesn't have money for fit out? sounds like a bridge deal to get the tenant in and stabilize the cash flow then get taken out with perm.
My first reaction was that this is a perfect bridge to perm deal, but I am curious to see if a 10 year fixed rate conduit deal will work straight away.
The sponsor has tremendous amount of net worth and enough liquidity to pretty much cover debt service in year 1 when there is no rental income coming in, but it is obviously favorable for them to use loan proceeds for fit outs, capital improvements. I am just not sure if the rating agencies will underwrite based on a as is basis when there is zero rental income in year 1. So, thats my main problem here.
It doesn't seem like these folks commenting originate CMBS deals. This is possible only if the tenant is IG and the timeline for them to be in place and open for business is less than 12 months from loan closing. You could structure this with a TI holdback and a 200% recourse completion guarantee. You could also have a rent reserve for Yr-1 DS shortfall, but typically these get done CMBS if they are near completion and almost moved in.
Grabbing my popcorn. This will be a good one!
Out of curiosity, can you structure a CMBS with only one tenant? My concern is one tenant does not achieve diversity of payers. It's not a pool of assets, so the CMBS is not really an asset backed security. Is it allowed in America?
Are talking about a loan or the actual securitized pool? You can most certainly structure CMBS debt with a single tenant. I have seen many acquisition loans close with a single tenant. Think about corporate HQ's, industrial warehouses, or grocery retail centers where your collateral is the anchor.
Thanks for sharing! I manage CDO/ABS in an Asian market, and I have done a few deals with one-tenant CMBS. I have always thought that was something only under-developed Asian market would do. My concern was if the one tenant went out of business, then the whole security, whatever tranche it is, would default. I think in Europe they call this kind of deals WHOLE BUSINESS SECURITIZATION.
That would be a huge concern - I wouldn't even begin to know how to UW that risk. Ever done something like this?
No its called SASB, (single asset-single borrower). Whole Biz is securitizing basically all of a business's operating assets: for example, if theres a large chain of restaurants then they likely franchise out a significant portion of their business. in this case, you can securitize the royalty income (% of rev off the top that franchisees are required to pay), IP, etc.) Think of this as a fancier version of secured corporate lending.
Thanks for sharing. I agree, it's fancier version of secured corporate synthetic loan. I recently read a report about SASB taking a higher portion of American CMBS underwriting in recent years. I was kinda surprised because "fake" securitization has always been Asian markets' thing. Not many Asian institutional investors have man power or skills set to analyze real diversified ABS/CDO such as mortgage and consumer credit, which requires intensive statistical and coding talents if you really want to fully understand what you're investing. Instead, Asian investors sometimes prefer products like SASB, because these products fit into their common credit analysis framework.
Here in Asia, the most common WBS deals are supply chain securitizations and all sorts of usufructs securitizations, In most cases the operating income wouldn't be able to cover the interest and principal of senior tranches, so it's basically just a risky loan with a story.
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