New Lending Platforms

New Lending PlatformsThere is wide recognition that the demand for refinancing and for acquisition debt funding is very large and unmet. It is highly likely that there will not be a large scale securitized lending market again for at least 2-3 years, until a variety of regulatory and legal issues are resolved, and until the bond buyers are comfortable the underwriting is back to 1993-94 rules, and the rating agencies have materially amended how they analyze risk. All of this is going to take time.  While there will be a few large securitized offerings that make news, there will be a long wait for the ordinary mid size to small property to get conduit funding again.To fill that demand there are various groups who are setting up, or have already set up lending platforms.  I have spoken to several and am involved in working with a few. The issues are quite interesting. None are very large since funding for them is limited and warehouse lines are not yet readily available. The ones that have been or are formed rely on equity investors to provide the funds. Those investors are generally seeking a 15% yield-part current and part PIK.  They generally are not interested in pure equity participations, but do want equity like returns through the PIK interest.The other issue is the investors want relatively lower risk than is required to obtain equity like returns. There in lies the rub. This has hampered some of the fund raising that is underway. It is why some of the proposed mortgage REITs have not been successful. It is also why some that have been raised are buying paper in the hope of higher returns.Buying existing paper, depending on vintage and originator, can be deeply flawed, and so may or may not turn out the returns intended if one is not careful what is being bought. Originating new paper for refi may also not drive the returns since a lot of better borrowers simply will not pay the price and will use extend and pretend for now. The main market is more likely the acquirer who will look at the PIK or participation as bridge equity. The issue there is the borrower will want short call protection so he can refi this loan as soon as there is a revitalized lending market at more normalized pricing- likely in 2-3 years.The groups now forming are likely to offer 80% -85% leverage on cost to acquire or current value, on the very reasonable bet that we have hit bottom and values will only rise from here ., making the leverage in 3 years more conservative and thereby refinancable.  The issue is that the investors who provide the capital to the lending platform are risk averse and view 85% leverage as too risky even though is probably is not if well underwritten under today’s numbers.Having created a lending platform myself in 1993, I have always believed that the exact right time to lend is at the very bottom of the cycle, like now, and to then stop lending 5-7 years into the upturn. That is when everyone else is lending and margins are squeezed, and underwriting and covenants start to get too easy.  When securitization is back in a sizable way, it is time to get out. In the meantime, high leverage lending if underwritten right, and priced to fully reflect the equity component risk of the B piece can be safe and very lucrative.