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Friday, 15 June 2018

Alternative Lenders Enjoy Efficient Financing Through CLO Market

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Commercial Real Estate Direct Staff Report

Things are getting interesting in the alternative lending space.

Players in the space, dominated by names such as Blackstone Group, Mesa West Capital, Starwood Capital Group, TPG Capital and Mack Real Estate Credit Strategies, are now enjoying extremely low-cost funding, thanks to what could best be described as a vibrant collateralized loan obligation market. That's allowed them to remain as competitive as ever when writing and funding loans.

Alternative lenders - they number between 90 and 100, with the bulk playing regionally or in the middle-market space - generally raise equity, from a variety of investor types, and use that to fund relatively short-term loans against properties that are in transition. Some also write construction loans.

Many will leverage their capital, either through repurchase agreements, warehouse credit lines and more recently CLOs. Given the pricing advantage currently enjoyed by CLO issuers, it's a good bet that more lenders will tap the market. Some say that alternative lenders might even tap the CLO market to raise financing that could be used to retire their warehouse or repo lines.

The most-senior bonds in static CLOs this year have priced at spreads ranging from 75 to 90 basis points more than swaps, providing their sponsors all-in borrowing costs of perhaps Libor plus 150 bps or less. Demand is being driven by traditional CMBS investors who are finding a lack of CMBS supply, as well as investors in other fixed-income sectors.

Depending on the borrower and type of collateral, repo facilities could carry rates that could be at least 25 bps greater than that and warehouse line rates could be 75 bps greater. But rates on repo and warehouse lines are in flux and are expected to tighten as a result of the CLO advantage.

Said one alternative lender about CLOs: "They're the optimized financing solution" for short-term loans.

CLO spreads have tightened because of healthy demand. The transactions so far all have been backed by a relatively small number of senior loans, allowing prospective investors to more easily conduct due diligence. In addition, a sponsor - the lender using the CLO to raise financing - will always keep at least 20 percent of a deal's most junior bonds, providing bond investors a greater level of comfort.

So far this year, 11 lenders have tapped the CLO market, raising a total of $6.4 billion of financing. That compares with $7.8 billion of issuance for all of last year. This year's numbers are expected to balloon, with some expecting issuance to more than double from last year's total.

Despite the better financing environment, and increases in the benchmark Libor rate, the returns that alternative lenders generally target have remained unchanged at 11 to 12 percent. That's because of the greater competition lenders have faced.

Not only are they battling for loans against other similar lenders, they're often facing small to mid-sized banks, which are increasingly stepping into the space as regulations loosen. Because of their funding advantage - their capital comes from demand deposits - they often can win a loan on pricing.

The thinking is that smaller lending institutions will increase their activity in the construction-lending business as well.

Said another alternative lender: "When a local bank comes in, we lose to them by a long shot." He added that a bank won a loan that he was competing for with a rate of Libor plus 185 bps. The cover bid was Libor plus 250.

Meanwhile, some are concerned that some lenders have become more lax than they had been by, for instance, providing additional extension options on their loans. The norm had been to write loans with an initial three-year term and two possible one-year extension options. That's no longer the case and lenders are far more willing to customize terms. Some are offering loans with two-year initial terms and up to five additional one-year extension options.

Also, lenders might be pricing their loans with a CLO financing in mind. That works if spreads remain flat or tighten. But it could spell trouble if spreads widen quickly.

Comments? E-mail Orest Mandzy, or call him at (267) 327-4281.



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Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

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CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

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