Solidarity Between Lenders and Borrowers Creates Stability

Over the last three months, there has been a solidarity and understanding between lenders and borrowers. In many cases, lenders have taken this as an opportunity to partner with impacted borrowers, and the partnerships have helped to create stability. Lenders on a webinar hosted by George Smith Partners last week discussed the moves that they have made to partner with borrowers, assess risk and open back up for business.

“We tried to re-underwriter everything as quickly as possible so that we had our heads around where the potential problems were,” Rachel Hunter of Apollo Global Management LLC said on the webinar. “We had our head around it pretty quickly, and I think that we did the right think both as a steward of capital and as being a partner to our sponsors. We are not going to sit back and let our sponsors take a lot of the heat because a lot of this is clearly not their fault. We wanted to work with them and try to come up with a plan to get through this unprecedented period.”

Tammy Jones of Basis Investment Group also assessed the firm’s risk and exposure to the market dislocation. “For me, an exogenous shock really has to make you rethink everything that you are doing. At basis, we quickly went into triage-mode and we really tried to focus on where our exposure was. As stewards of capital, we came up with our downside analysis so that you can see where the uncertainty will be,” she said in the conversation.

In addition, Jones looked at options and tools to help borrowers make it through the market dislocation. “We were able to provide rescue equity to the sponsors. We offered to everyone in our fund to basically top off reserves,” she added. “We basically said: we want you to use your capital to run the property and because you didn’t cause this, we want to figure out a way to provide some capital. The program was well received, and it allowed our borrowers to stay current and us to stay current. It was really a characteristic of the ‘we are in this together’ idea. It gave our borrowers relief.”

Today—more than three months into the crisis—both companies are actively funding deals. For Jones, participation has focused on equity and structured capital. “We are looking at deals across our capital stack. Since COVID, we have put out $100 million in equity, which is about $400 million in deal flow,” she said. “The deals are in what I will call the secondary markets, which is where we focus. Our underwriting is more conservative on year one and year two, but many of our borrowers were doing the same. We are all in the unknown and hopeful that in the next couple of years, there will be some normalcy. In terms of leverage, we do dequity, so we are looking at structured equity positions.”

For debt, Jones has scaled back activity. “On the bridge side, lending has dialed back a bit and we want to make sure that we are allocating capital accordingly,” she explained. For Hunter on the other hand, the firm is providing debt in certain asset classes. “As the corporate bond market has rallied and we are back to 52-week averages, we are very much open and think that real estate fits within that risk-adjusted return,” she said. “I think that you are seeing a lot of life companies, including us, get back into the space. It wasn’t necessarily not wanting to invest, but it was being good stewards of capital. We are following what a lot of other life companies are doing. We are looking at multifamily, industrial and office. We are not doing hotels and retail is very selective. Between the food groups of multifamily, industrial and office, we can stay very busy and put a lot of capital to work.”