'Hybrid' Facilities Pitched to Bridge Lenders
Goldman Sachs, Morgan Stanley and Natixis are stepping up their efforts to market hybrid warehouse facilities to bridge lenders.
The facilities are a cross between traditional warehouse credit lines and CLOs. Compared to traditional warehouse facilities, they are less susceptible to margin calls, can require less recourse and have terms that match the collateral’s maturities, making them more akin to CLOs. But they avoid the fees associated with securitization.
So far, according to market pros, perhaps only a half-dozen or so hybrid facilities have been provided over the past year, to clients such as Invesco Real Estate and KKR. But the facilities are being aggressively marketed to top-rank bridge lenders. Goldman and Morgan Stanley are acting as principals and syndicating the facilities to institutional investors and other warehouse providers. And Natixis is seeking to arrange credit lines funded entirely by third parties. Athene, an insurer managed by an Apollo Global subsidiary, is among the institutional investors that have taken down one or more portions of such facilities.
The initial facilities have financed big, high-quality loans. Some are much larger than the $20 million average for a CLO, making them unsuitable for securitization because of concentration risk. “The ratings methodologies are looking for more diversity,” said one bridge lender. The facilities can also have lower debt-service-coverage ratios than rating agencies prefer. But the warehouse providers are also pushing the facilities for smaller loans, a move that could cut into CLO issuance if successful.
Warehouse providers have long offered more-favorable terms to their best customers, including real estate lenders. In a briefing for stock analysts over the summer, a Blackstone executive noted that his firm had benefited from attractive features “for years.” But the facilities currently are being tailored specifically for top shops in the burgeoning bridge-loan market and are being marketed more widely. Individual facilities can differ in subtle ways and can be custom-built for specific portfolios.
The providers describe hybrid facilities as a win-win proposition. For their part, providers can offer attractive financing to their best customers at a time when there is strong demand for such high-quality paper in the private-placement market. And those customers gain more flexibility along with a favorable borrowing rate.
Warehouse lenders emphasize that they aren’t eliminating the checks and balances that guard against bad loans. Rather, they say they are softening terms for top originators and mortgages to provide the kind of flexibility available in CLOs. In fact, some market participants are loosely referring to the facilities as “private CLOs.”
A relaxation of mark-to-market requirements is an especially attractive element for bridge lenders, especially in a slowing economy, when the potential for margin calls is higher. “Everyone thinks we are late in the cycle, and they would like to mitigate their risk to margin calls,” said one large bridge lender.
Another lender said that if, for example, a tenant that leases half of an office building goes bankrupt, the warehouse provider can force a bridge lender to immediately pay down the line. “In private CLOs, the margin call is more mechanical,” he added. “If a loan is in default, you might have to pay it down by a certain percentage after 30 days, then more at 60 days and take it off private financing only after 120 days. In a traditional warehouse, you can get to 100% right away.”
In another similarity with CLOs, hybrid lines provide “match funding” whose terms mirror those of the mortgages. On traditional lines, by contrast, providers typically can demand repayment before the collateral matures. Hybrid lines can also require bridge lenders to put up less recourse than with traditional lines.
One CLO issuer said that a hybrid line can be an effective way to unwind the remnants of a seasoned securitization that is no longer economical. “You have a CLO that has paid down more than 50% and is no longer accretive, and you need to clean it up,” he said. “You could put it in a [traditional] warehouse line, which is what most people do, but then you have to worry about recourse. Private placement is better.”