Mezz Lenders Shift Tactics as CMBS Slumps
The slowdown in the commercial MBS market is forcing mezzanine lenders to change tactics.
High-yield shops often work in conjunction with CMBS programs on lending opportunities. In some cases, a CMBS operation lines up the borrower and places the junior portion of a debt package with a mezzanine lender. In other cases, the mezzanine lender identifies the borrower and places the senior piece with a CMBS lender.
But after bond-market upheaval led to a dramatic slowdown in CMBS lending this year, mezzanine lenders increasingly have had to rely on bank balance-sheet lenders as partners.
“The mezz guys have had to focus more on creating partnerships with the banks,” said one longtime bank lender. “It’s all about those relationships now. They often bring us the opportunity, wanting us to do the senior while they take the mezz.”
Commercial Mortgage Alert’s fifth annual review of mezzanine lenders has identified 86 firms that actively provide high-yield financing on commercial properties. The review tracks firms that write B-notes, mezzanine loans, “stretch” loans or preferred equity structured like mezzanine debt (see list on Pages 24-44).
For large fixed- and floating-rate loans, CMBS shops often commit to financing the entire amount and later place the subordinate portions with mezzanine lenders. But the blowout in bond spreads this year has made CMBS programs less competitive with portfolio lenders. “We might still see a few of the high-end deals coming down the pike in CMBS,” said one longtime lender. “But a lot of that activity has migrated over to the banks.”
Meanwhile, the origination of fixed-rate mezzanine loans in conjunction with conduit mortgages has also slowed because of the decline in conduit originations.
Overall, one CMBS issuer estimates, mezzanine lending opportunities have shrunk by at least 30% in the sector.
Nevertheless, the overall outlook for the supply of mezzanine loans “is pretty good,” said Jeff Fastov, senior managing director of Square Mile Capital. He noted that the outsized amount of 10-year CMBS loans originated during the 2006-2007 peak of the last cycle will create significant refinancing opportunities into 2018. “And it’s more than CMBS — there are a lot of properties locked up in loans apart from CMBS that are capital-starved and in need of gap capital,” he said.
At the same time, the underwriting standards of some senior lenders are becoming more conservative. That “means the mezz pieces have to get bigger, which is good for us,” he added.
Competition is especially strong for the junior portions of loans on trophy properties. Korean insurers, including Hanwha Life, Kyobo Life and Samsung Life, have moved aggressively into the market. Such mezzanine debt, which can lift loan-to-value ratios to 50-70%, carries skimpy coupons of 5-6%.
At the other end of the spectrum, mezzanine loans on lower-quality properties that lift leverage ratios to 80-85% command coupons of 10-12%.
One lender said fund raising by mezzanine shops is currently limited because it’s too hard for lenders to “tell a new story, to differentiate themselves” to investors. Also, some lenders fear that property prices are peaking.
“This is the time in the cycle when people are working very hard not to make a mistake,” said one mezzanine pro. “There are still good opportunities out there, but you have to move very carefully.”
The list of mezzanine lenders contains investment managers, fund shops, finance companies, REITs and insurers. Also included are investment banks that place mezzanine financing with third parties in conjunction with the origination of senior debt.
The list, based on a survey of lenders, isn’t comprehensive. Some lenders declined to participate or supplied only partial information. Also, some lenders, especially foreign shops, work quietly through investment banks to stay under the radar. Origination volumes couldn’t be independently verified. Lenders were asked to supply totals only for subordinate debt, but some likely also included senior debt, inflating their numbers.
But the review identifies most of the participants in the vibrant mezzanine-lending market. It indicates that the sector’s biggest players, outside of the investment banks, include Apollo Global, Blackstone, Brookfield Real Estate, Cornerstone Real Estate, Goldman Sachs Merchant Banking, Mack Real Estate, Square Mile and Starwood Property.