Loan Note: Goldman’s Salisbury highlights RE debt opportunity; Apera sells stake to Kudu

Goldman Sachs takes keen interest in real estate debt. Plus: distress rising in US CRE market; and Apera is the latest private debt firm to sell a stake in itself. Here’s today’s brief for our valued subscribers only.

They said it

“We expect to see more and more distressed M&A in the coming months – both in court and out-of-court workouts and restructurings, particularly in the consumer sector”

Partner Mike Ellis quoted in law firm Proskauer’s Beyond the Deal series

First look

Solid foundations: Goldman likes the look of real estate debt (Source: Getty)

Goldman Sachs likes the real estate debt opportunity
Goldman Sachs’s chief investment officer of asset and wealth management, Julian Salisbury, thinks there’s a big opportunity in real estate debt over the next few years.

At the firm’s mid-year investment outlook for the press, Salisbury distinguished between corporate credit and real estate credit in response to a question about the effect of the regional bank turmoil on private credit.

“Sponsors did a pretty good job at prudently pushing out maturities over the last couple of years, taking advantage of the lower rate environment,” he said. Therefore, the amount of refinancing needed this year and next is “relatively modest and manageable”, with spreads still quite attractive at more than 10 percent, having come in a bit in the last few months from the 12-13 percent type return for senior secured credit.

Regional banks weren’t really big players in that market, at least on a direct basis. Many of them were involved in providing back leverage or financing to the private credit providers.

“It’s a good opportunity, and it also feels somewhat orderly,” Salisbury said.

Not so for real estate credit, where the regional banks were “huge players”, providing 60-70 plus percent of the financing to the US real estate market, often with relatively short duration loans of three or four years.

Although they may have had interest rate hedges through those first few years, “you are increasingly coming up on rate resets, if not final maturities, of about $1.4 trillion between now and the end of next year. And that’s going to be very hard to digest”. It’s not clear where the alternative source of capital is coming from, he said.

At the same time, net interest margins of banks are under pressure, and banks are having to make disclosures around how much commercial real estate they have. “They’re all going to want to show lower quantums with each successive quarter.”

That means they’re not going to be excited about making new loans. “They’re all going to be suffering increasing levels of defaults, I suspect, over the next one to two years,” he said. And they will likely have to hold more capital, which means that “they’re going to be very discretionary in terms of new lending that they’re making”.

Enter alternative sources of capital that will have to emerge to fill that gap. Although there are private and non-bank players in the real estate credit space, it’s still small relative to the size of the refinancing that’s coming up, Salisbury said.

“We’re pretty excited about the opportunity to be an alternative lender to the real estate market over the next couple of years,” he said, adding that the activity level’s currently quite low because “everyone’s just kind of kicking the can down the road”.

Salisbury said that “we’re still in the very, very early innings”. The difficulty is now largely concentrated in office, he said, noting that it’s more nuanced than that. “There’s a relative shortage of true Class A offices in growth cities. It’s back to this dispersion point. If you own lower quality offices in more troubled geographic locations, it’s very bad.”

MSCI tracks rising distress in US CRE market
A preview of a new report by MSCI Real Assets shows that distress in the US commercial real estate market rose to $71.8 billion at the halfway point of 2023. This means that the second quarter was the fourth consecutive quarter in which distress increased.

The preview of the report, the US Distress Tracker, appears within the latest copy of MSCI’s US Capital Trends.

The preview indicates that distress (the value of troubled assets) peaked after the global financial crisis, rising above $150 billion before beginning a long decline, and then falling to a low at one-tenth of that amount before covid hit.

The pandemic drove the number back up above $50 billion. Successful stimulus measures brought it back down, but only briefly, and at present distress is again on the rise.

“Distress” for the purpose of this tracker is understood as direct knowledge of property-level distress, as indicated in announcements of bankruptcy, default, or court administration or other significant publicly reported issues. Distress in this sense is a synonym of “special servicing”.

There is also “potential distress”, also known as potentially troubled or watchlist. Examples include delinquent loan payments, forbearance and slow lease up/sell out. As the preview/inaugural issue observes of the Distress Tracker, this can include “CMBS loans placed on master services watchlists”.

An example of the granularity of the tracker: the Virginia suburbs of Washington, DC, have more than $2.2 billion distressed property value and potential distress of just below $2 billion. The broader region into which those suburbs fit, the mid-Atlantic, has distress of $8.6 billion, and potential distress of just under $16 billion.

Kudu takes minority stake in Apera
Apera Asset Management, the UK-based pan-European fund manager, has sold a minority stake to Kudu Investment Management, a provider of capital solutions to asset and wealth managers.

The deal is the latest in a long line of similar strategic tie-ups by private debt managers as they seek capital for further growth. The financial terms of the Apera/Kudu deal were not disclosed.

Formed in 2016, Apera provides private debt solutions for mid-market businesses in the UK, Germany, Austria, Switzerland, France, Benelux and the Nordics. It manages more than €2.6 billion on behalf of institutional investors in Europe, Canada and the US.

Apera remains majority owned by its partners and is led by founding partners Klaus Petersen, David Wilmot and Robert Shaw. The firm and its affiliates have 38 employees in London, Munich, Paris and Luxembourg.

Apera is Kudu’s third partnership in the UK and Europe, following alternative credit manager Fair Oaks Capital in 2018 and special situations manager Warwick Capital Partners in 2019. In all, the firm has backed 25 asset and wealth managers in the US, Canada, UK, Europe and Australia since it was founded in 2015.

“Kudu emerged as our preferred strategic partner when we began exploring paths to accelerate Apera’s growth initiatives and to diversify our client base,” said Petersen.


Loan defaults speed ahead of high yield
Leveraged loan defaults continue to outpace high-yield bond defaults, according to the BlackRock Global Credit Weekly.

The trailing 12-month, issuer-weighted default rate for US dollar-denominated leveraged loans was 4.03 percent at the end of June 2023, and 2.7 percent for US dollar-denominated high-yield bonds. The difference between the two is the largest since 1996, according to Moody’s.

“We expect this pattern – which is unusual in the context of the past two decades – to persist in response to the higher cost of capital environment,” said BlackRock.

BlackRock said its year-end 2023 default rate forecast for US dollar leveraged loans and high-yield bonds combined is between 5-6 percent. This compares with a combined rate of 3.8 percent at the end of June. It added that, because of the resilience of US growth, the risk of error is in the direction of a slightly lower default rate than forecast.

The leveraged loan default rate is expected to continue outpacing high-yield bonds, though lower quality high-yield issuers are also expected to play a large role.

Shake-up in structured credit at Angelo Gordon
Angelo Gordon & Co, the credit and real estate fund manager, has made appointments to boost its structured credit business.

Marc Lessner and Xavier Dailly, both existing managing directors at Angelo Gordon, have been appointed co-deputy portfolio managers of the firm’s open-end structured credit fund. T.J. Durkin, the firm’s head of structured credit, and Yong Joe, head of structured credit research, continue to lead the fund as co-portfolio managers.

Strengthening the structured credit platform’s asset-backed securities effort, Aaron Ong, a 17-year veteran of the firm, has been named head of private asset-based credit. Additionally, Sunil Kothari, who joined Angelo Gordon in 2019, has been appointed head of European ABS.

Joining the structured credit team as head of commercial real estate debt is David Busker, who most recently led commercial real estate strategies and served as a portfolio manager at Tilden Park. He will assume responsibility for Angelo Gordon’s liquid commercial real estate securities investments from Andy Solomon, who has led the strategy for 17 years and will be retiring at the end of 2023. Solomon will work with Busker in an advisory capacity until the end of this year.

Based in New York, Busker will report to Durkin and work alongside Ong and Kothari as well as Nick Smith, who joined Angelo Gordon’s structured credit team in 2021 as head of residential mortgages.

LP watch

Institution: Quincy Retirement System
Headquarters: Quincy, US
AUM: $810.05 million

Quincy Retirement System has committed $4 million to Torchlight Debt Fund VIII, according to recently published meeting minutes.

The fund launched in May 2022 and held a first close in December 2022 on $858.25 million. The real estate sector-focused fund has a senior debt strategy that covers the North American region.

Platinum subscribers may click here for the investor’s full profile, including key contacts, allocation strategy and fund investments.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing