Paid at par plus accrued after 26 months, though month 14 nearly ended it

Closing out a deal that actually finished, so here are the numbers before I forget them.

$35,000 into a senior secured position on a 96 unit value add multifamily in a mid sized midwest market, raised on a portal. 11% current pay, monthly, 24 month term with two six month extension options at the sponsor's election. Loan to cost around 68%, sponsor equity of about $4.1m under me, personal guarantee from the two principals. Platform took 1% at origination out of the borrower's side plus a small servicing spread, so my quoted 11% was the number that hit my account.

Months 1 through 13 paid on the first business day every month, $320 and change. Month 14 the payment did not arrive. Month 15 it did not arrive either. The platform's update said the sponsor had a cost overrun on unit turns and a slower lease up than the pro forma, which is a sentence you learn to translate.

What kept it from being a loss: the loan documents had a default rate that stepped from 11% to 16% after a 10 day cure period, and the platform actually invoked it. The sponsor came back in month 17 with the two missed payments plus default interest on the arrears, and then paid current every month after. They exercised the first extension option, and paid off in month 26 out of a refinance at par plus the final month.

All in, I got $9,240 of interest on $35,000 over 26 months, about 12.2% annualized once the default interest is counted. Principal came back whole.

What nearly broke it was those two silent months. The platform's first update was 19 days after the missed payment and said almost nothing. I only got detail because I emailed and asked for the borrower's construction draw log and the current rent roll, and to their credit they sent both.

What I would keep: only looking at deals where the default rate steps up meaningfully and the platform has invoked it before, on some other deal, and will tell you which one. And reading the cure period before the rate.

2 replies

1chriswalton8CC1CPRO8

The part that sounds easy in your telling is the platform invoking the default rate. In my reading of private capital that is where most of these go soft, because the servicer wants a relationship with a repeat sponsor more than it wants your 16%. So the question I have is what forced their hand. Was it a mandatory provision in the documents, or discretionary and they chose to use it?

Second question, and I think it is the one that decides whether this was a good process or a good outcome. What happens if the sponsor's refinance at month 26 does not appraise? You had $4.1m of equity under you at 68% loan to cost, which is real cushion, but cushion measured against cost, not against value. If the exit value came in 15% light, the refinance shrinks, the sponsor has to bring cash to close, and you are in an extension conversation with a borrower who has already missed twice.

Also, the two silent months. You emailed and got the draw log. Did the offering documents entitle you to it, or did a person happen to be helpful that week? Those are very different things to rely on next time, and I would want the answer in writing before I put money on that platform again.

0megan_doyle15 Get yours

I have not dealt with any of this before, so I am mostly writing down words. A default rate that steps from 11% to 16% after a cure period, and a draw log you can ask for. Did the sponsor ever explain the overrun, or just pay and move on?

Paid at par plus accrued after 26 months, though month 14 nearly ended it

2 replies