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Second lien paid off a mezz I'd almost written off

sramaswamy82sramaswamy82Get yoursPRO16

Bought a second lien on a mixed-use in Bridgeport, CT in late 2021 for $38k, well behind a senior at about 68% LTV, and I figured I was looking at a three-year grind at best. Borrower was slow on everything, missed two payments in 2022, and I had basically parked it mentally. What I did not expect was the sponsor refinancing the whole stack in Q1 2024, and when the mezz holder in the deal settled out, the payoff waterfall actually cleared my position at 1.31x. I was not in the mezz, I was the second lien sitting just below it, and I got paid because the refi proceeds were fat enough to cover everyone. Total hold was 28 months. I have seen this exact structure fail three times in the last four years where the refi did not happen or happened thin, so I am not pretending this was skill. The Bridgeport market tightened faster than I projected and the sponsor had a lender ready. I just waited long enough for the timing to work out in my favor, which is more or less the only plan I have.

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2 replies

deeholl22deeholl22CU4B

The 1.31x on a 28-month hold is real but I would push back on that being exceptional for a second lien that survived a mezz overhang. Running the math on deals I have been watching in secondary Connecticut markets, the ones that actually clear cleanly are coming in closer to 1.38 to 1.44x when you factor in the default interest that accrues during the slow payment periods. Two missed payments in 2022 on a note you bought at $38k, depending on your rate and whether you had a default rate kicker in the docs, that spread could have been worth another $4k to $6k at payoff. If it did not show up in your waterfall number I would go back and look at how the payoff was calculated because I have seen servicers just apply the note rate straight through even when the default provision was triggered.

The part that actually interests me here is the mezz holder settling out before you, and the refi proceeds being fat enough to trickle down to your position. That sequencing is the whole game in these stacked deals and it almost never lines up that cleanly. Bridgeport specifically had a weird 18-month window in 2023 into early 2024 where cap rate compression on mixed-use was pulling valuations up faster than anyone expected given the broader rate environment. A sponsor with a relationship lender could actually get a refi done at numbers that looked crazy on paper. I have been sitting on cash watching exactly this type of deal in New Haven and Waterbury for two years now and the ones I passed on because the stack looked too messy are the ones that keep coming back to haunt me.

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