CREFC Miami 2020: Structure Continues to Loosen in Bridge and CLO Spaces

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Bridge lenders and commercial real estate collateralized loan obligation (CLO) issuers are looking to asset performance to gauge whether loosening loan structure will become a problem in a slowing market. 

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Many market participants in the bridge and CLO spaces who were at this year’s annual Commercial Real Estate Finance Council (CREFC) convention in Miami agreed that loan structure is indeed loosening and business plans are taking longer to execute. But because asset performance and valuations have remained strong, players aren’t panicking quite yet.  

“Structure, for the last 18 months [has been] loosening,” said one debt fund professional who focuses on whole loan execution. “We do a lot of construction [lending]. Two or three years ago, you were getting recourse, and now certain sponsors are pushing back on some aspects of that. Cash management has changed and their projections on rent and net-operating-income growth are subdued. But, we’re not seeing it in [loan] performance yet, because values haven’t dropped.” 

One CREFC attendee who’s a credit manager at a major bank said that “overall we’ve been in a good cycle, so most things have performed well reaching stabilization.” But they pointed to multifamily deals in New York City, where landlords are bearing the weight of the new rent control laws, as an example where timelines have been progressing much more slowly than the developed business plan, meaning that the value proposition for such deals is tougher to grasp.

Still, one ratings agency professional noted that “we need to make sure we can withstand some performance issues,” due to the fact that business plans are taking longer than in past cycles, when borrowers might’ve moved through a business plan rapidly, sometimes not even reaching completion before they move to sell, because of demand. 

“We [really] focus a lot on business plans [and] we rely on asset valuation,” said one CREFC attendee who’s an analyst at an investment management firm. “Coming out of the crisis, valuations were conservative. As we get further into the cycle, we focus on sponsorship.” 

And those sponsors are enjoying the luxury of not only a crowded field of lenders but historically low interest rates. The conservatism and carefulness exhibited in the bridge and CLO space can mostly be attributed to low rates, which has disincentivized many lenders from taking on more risk. As a response, to get comfortable with riskier deals, many lenders are seeking more credit enhancement. 

“At this time we’re conservative and think it’s time to be selective because you’re not being paid enough for additional risk,” said the analyst.