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CMA
May 15, 2020  

CLO Shops Turn to Private Financing Deals

The disruption of the commercial real estate CLO market is prompting more issuers to turn to private transactions as a way to shore up their financial positions.

At least two issuers completed private placements of deals backed by loan portfolios in recent weeks, and three or more others are seeking similar arrangements. The transactions vary in detail, but effectively are a cross between a CLO and a warehouse credit line based on repurchase agreements.

The facilities, referred to by market pros as “private CLOs” or “hybrids,” provide an alternative to floating a securitization in a market where spreads blew out with the onset of the coronavirus crisis and remain elevated. And they’re seen as more reliable than traditional warehouse lines, which can be subject to margin calls if loan values decline.

The strategy emerged before the pandemic, with Goldman Sachs and Morgan Stanley as the primary underwriters, arranging them for top clients. Other major banks are looking at marketing such deals for CLO issuers seeking to get loans off their warehouse lines.

“These repo-like securitizations are something we will see a lot of in the coming months, as people come off traditional repo financing and find something more stable,” said Richard Jones, co-head of the finance and real estate practice at law firm Dechert. He predicted the hybrid deals will hold sway for at least several months until the public CLO market regains strength.

One issuer that completed a private transaction recently is Ladder Capital, which, like other mortgage REITs, has been taking extraordinary steps to wind down bank warehouse lines and avoid the threat of margin calls. Goldman placed the offering, possibly with its own private asset-management arm.

The investor financed 65% of a $300 million loan portfolio, with Ladder retaining the bottom 35% of the deal. By comparison, in public CLO deals floated before the crisis, the issuer typically sold 85% of the securities and retained the junior 15%.

Pricing couldn’t be learned, but sources said the cost to Ladder was well above a typical CLO issue or warehouse line. Last year, the blended cost of funds for top managers via a CLO was roughly 150 bp and for a warehouse line about 175 bp.

In a separate move, Ladder this month arranged a $200 million warehouse line that isn’t subject to credit markdowns — paying the Koch Brothers real estate arm a whopping 10% over one-month Libor.

Deals like that, a source said, show the “desperation” of CLO shops to move away from repo funding.

“All these alternative forms of financing imply some level of distress,” said a pro at another CLO issuer. “You don’t come to market now unless you have to. The banks have been patient with warehouse lines [on loans], but at some point they will start pushing.”

Several mortgage REITs, including Angelo, Gordon & Co. subsidiary AG Mortgage, Exantas Capital and TPG Real Estate Finance, have already been clobbered by margin calls on warehouse lines they used to hold commercial-mortgage securities. As bond values plunged in late March and early April, they were forced into fire sales. TPG reported it lost $203.5 million selling off commercial MBS. Exantas lost $180.3 million (see article on Page 8).

For the loans in CLO issuers’ portfolios — mostly bridge loans on transitional properties — it’s too early to know how the current crisis may affect their values. But the risk of markdowns and margin calls has provided new impetus for firms to exit repurchase agreements and turn to options such as private placements.

The latest versions of the so-called hybrid deals contain language allowing the lenders to work with borrowers on forbearance and other accommodations to help them get through what market pros hope will be relatively short-term disruptions in cashflows. The transactions generally have other advantages over repo lines, including less recourse and terms that match the maturities of the mortgages. Meanwhile, they provide the flexibility to finance pools of large loans that would be difficult to securitize in the public market because of rating agencies’ concerns about concentration risk.

Although sometimes referred to as “private CLOs,” they differ in several ways from traditional CLOs. Some are closer in form to a loan. Others are structured as securities, but the tranching is basic, with a bank, insurer or money manager taking down or syndicating the entire senior portion while the bridge lender retains a large bottom piece. Buyers can command higher rates than a public CLO would carry, but the seller can save on issuance costs.

The uptick in interest in private deals comes as the public new-issue market has been frozen since early mid-March. However, Argentic this week began marketing a $607.4 million static CLO backed by 24 loans on 45 mostly office and multi-family properties (AREIT 2020-CRE4). It’s a somewhat smaller version of a deal it initially planned for April. Wells Fargo, Goldman and Morgan Stanley are running the books.