Counted the word "pledge" nine times on a recap call I was only listening to
A sponsor I've been tracking for eventual first-deal reasons let me listen to a recap call. Not participating, just muted and listening, because I'd asked enough questions that he got tired of typing.
The deal is a five building flex portfolio in a secondary market. Old loan was written years ago at a rate that doesn't exist anymore. It matures next year. New senior quote comes in materially smaller because the coverage test bites at the new rate, and the sponsor is short by an amount that made me put my pen down.
So the call is about filling that. There were two groups on. One wanted to do it as preferred equity, sitting above the common but below the senior, with a stated return and no lien. The other wanted mezzanine, structured as an actual loan with an interest rate, secured by a pledge of the membership interests in the holding company.
The word pledge came up over and over. What gets pledged, who signs it, what happens to the property manager if the pledge gets exercised, whether the senior lender will even allow a pledge to exist above them. Apparently that last one is a real fight and there's a whole separate agreement between the two lenders about who can do what and when.
The part that surprised me: the sponsor said he preferred the preferred equity because of how it looks on his balance sheet. The mezz shows up as debt and pushes his total leverage number up, and interest payments come out of net income. The other one presents more like equity. Both are expensive. He said the accounting treatment was the tiebreaker, which is not where I thought that conversation would land.
I'm working out what my first deal costs and I'm eight zeros away from this. I still learned more in ninety minutes than in the last two months of reading.