Minimum multiple or a hard outside redemption date, if the sponsor will only give you one

Question

I've been reading pref documents rather than doing them, and the same negotiation appears in every one. The sponsor will concede either economic certainty or timing certainty. Rarely both, and if you push for both you get a worse coupon.

Option one is the minimum multiple. Say 1.30x on invested capital regardless of when you're redeemed. Your dollars are defined. If the sponsor sits on the asset for six years, your IRR grinds down toward the coupon and there's nothing forcing an exit, but you can't be paid off cheaply in month 13 when the property has repriced upward.

Option two is the hard outside redemption date. Month 36, full redemption of capital plus accrued return, and if it isn't paid, your rights kick in. Your timing is defined. Your dollars are whatever the coupon produced, so an early redemption at month 14 hands you a return you never wanted at that duration, and a late one at least gives you a trigger you can act on.

The case for the multiple is that it's self-executing. It's arithmetic in the waterfall and nobody has to consent to anything for it to apply. The case for the date is that it's the only clause that converts a slow deal into an event, and a slow deal is the most common way these positions go sideways. A pref position with beautiful economics and no date can perform on paper for years while your capital sits there.

The counter I keep coming back to is that the date is only as good as the remedy behind it, and the remedy usually needs the senior lender's cooperation, whereas the multiple needs nobody's.

Which one would you hold onto?

ryanmck27 · Answer

I haven't done one of these yet, so bear with me, but the multiple sounds like it protects you from being paid off too early and the date protects you from never being paid off at all. Aren't those two different fears? I'd have guessed which one you pick depends on whether you think this particular sponsor is more likely to be greedy or stuck.

brandonlee36 · Answer

@halyard has it about right and I'd say stuck is the more common failure. On a small portfolio scale I've had partners who wanted out early exactly once, and partners who couldn't get out for years several times. If frequency is the guide, the date is the more useful clause.

monica_tran3 · Answer

Service business owner so I'm outside the structure, but I've watched a client's deal where the pref had a 1.35x minimum and no date. Asset performed fine. The sponsor held it four extra years because the refi math didn't work at the new rates. Pref holder got their 1.35x eventually and their annualized number was mediocre. Nobody breached anything. That's the failure mode nobody diagrams.

mitchell_ray4 · Answer

Dumb question. If the outside date passes and the sponsor just doesn't pay, what actually happens the next morning? Someone earlier in another thread said the remedy needs the senior lender to agree to things. So is the date real or is it a letter?

devon_pierce · Answer

@solder, that's the whole argument in the original post and I don't think the answer is clean. The date gives you standing to act. What acting gets you depends on the documents.

diane_kowalski · Answer

The thing that pushes me toward the multiple is that it survives a bad market. If the outside date lands in a year when nothing is refinanceable and nothing is selling, your trigger fires into an empty room and your practical choice is to amend. A minimum multiple doesn't care what year it is. It just sits in the waterfall and grows your claim on whatever eventually happens.

wendy_park48 · Answer

I'd keep the date, with a specific condition, and the reason is that @arbor's point argues for the date rather than against it.

A minimum multiple that grows against an asset which can't support it isn't a claim, it's an accounting entry. I held a position where the multiple accreted past any reasonable value of the property and my recovery was still whatever the sale produced minus the senior. The multiple defined my claim beautifully and paid me 0.7x.

What the date does is put a decision on a calendar. Even if the remedy is weak, the amendment conversation happens on a date you chose, at a time when the sponsor needs something from you, which is the only leverage a subordinate position reliably has. I've repriced a coupon and taken additional protections in exactly that conversation, and none of it would have happened without a date forcing it.

The condition is that the date has to come with something that hurts if it's missed. Default rate stepping up. Loss of the sponsor's discretion over distributions. A forced sale process that doesn't require senior consent to start, even if closing does. A date with no consequence attached is a calendar reminder.

And @thatch's example is right about the outcome, but the reason it happened is that there was no date, so the sponsor's decision to hold four more years cost him nothing.

tonyv88 · Answer

@fathom, the distribution discretion one is the piece property managers see first. Once the pref holder controls whether cash leaves the property, behavior changes within a month. Nothing else in the document moves people that fast.

sonia_alvarez · Answer

I'd take the multiple, mostly because of what I see in senior loan documents. The redemption right I'd be relying on frequently collides with the senior's lockout or defeasance provisions, so the date I negotiated turns out to be a date I can't act on without a consent I don't control. @fathom's version works if you can get the consequence clause, and I'd agree the date is better in that case. My experience is that sponsors give the date and then fight every one of the consequences, so you end up holding the weaker half of what you asked for.

Also the multiple gives you something the date never does, which is protection against a fast win. Property reprices, sponsor refis in month 15 at a lower rate, pays you your coupon and shows you the door. That's the outcome where the multiple earns its whole negotiation.

dmitri_v6 · Answer

There's a middle draft that shows up more than this thread suggests, which is a minimum multiple that steps with time. 1.20x if redeemed inside 18 months, 1.30x after that, plus a redemption date with a default rate step-up. You're paying for it in the coupon, so it isn't free, and I'd rather buy it than pick.

On the pure choice, I'm with @tender. Self-executing beats discretionary. The number of remedies in these documents that require someone else to agree is the thing that surprises people who haven't read a stack of them, and any protection that operates as arithmetic in the waterfall is worth more than its face value for that reason alone. Whether a specific remedy is actually exercisable given the senior documents is a lawyer question in every deal I've seen.

Minimum multiple or a hard outside redemption date, if the sponsor will only give you one

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