PITTSBURGH — Michael Thomas sees the current state of syndicate transactions following two paths, one a bit safer than the other. “There’s the bread-and-butter syndicated finance,” says the EVP of Debt Capital Markets for PNC Bank, NA, “such as larger construction or term loans with all the regular leverage levels.”
Then there’s what he terms the “sexier” path, with “a little more leverage, the event-driven deals such as the acquisitions of public companies by private entities.” He cites the recent privatizations of General Growth Properties by Brookfield and EdR’s acquisition by Greystar as prime examples.
There are also two primary drivers of syndicated deals today, Thomas says, and one is what might be called sure bets. “REITs for the most part are credits everyone can get their arms around,” he tells GlobeSt.com. “In most cases they’re investment-grade or relatively low- leveraged entities. Plus, as far as real estate borrowers go, they’re in need of ancillary services, such as treasury management or derivative business.
“As a result,” he continues, “you have a lot of lenders who like to lend into that space.” And even though activity is a bit quieter this year, “2018 is still on pace to be in the top three or four volume years for REIT-syndicated financing.”
That relative quiet can refer to the syndicate market in general. “Very large syndicate deals are actually a bit scarcer these days,” says Thomas. So much so, in fact, that he describes a frenzy circling those deals that do arise.
“People are competing very hard to win those deals,” he says. “Historically, we would see more large construction financings for office buildings or regional malls. Or we might see very large individual mortgage financings. Today we just don’t see that many of those.” Obviously, part of that is market-driven. In other cases, he continues, the deals are being “gobbled up” by the insurance companies and other non-bank financial institutions.
What has risen to the surface is more club-like deals, he says, with a syndicate of only two or three lenders. While average deals typically run north of $80 or 90 million, “you’ll also find lenders who for various reasons are syndicating deals as small as $15 million to $25 million,” says Thomas, “depending on their particular risk appetite or their exposure to that client or borrower.”
Which brings up the other driver of syndicate deals today: relationship lending, a dynamic that is growing as part of the banking environment, as GlobeSt.com reported previously.
“Prior to the financial crisis in ’08,” he says, “there were a lot more lenders in the market willing to buy into syndicates with the idea of asset growth. They weren’t as focused on relationships with the borrower or, as we see with REIT activity — the possibility of ancillary revenue.”
That, he says, has changed: “Since the crisis, there’s been a much greater reliance on relationship lending. It’s more difficult to sell a loan to someone who doesn’t have a relationship with that borrower already or doesn’t see the possibility of a strong relationship and additional fee revenues. There aren’t that many lenders out there today that will just look for assets to buy.”
The Latter Innings
Certainly the tax climate has changed a lot in the past year, but, says Thomas, that is less impactful of syndicate activity going forward as much as what he refers to as secular dynamics. “Market participants are always on the lookout for signs that we’re in the latter innings of an economic expansion,” he says. “All of us have spent a lot of time trying to figure out when the worm might turn.
“That’s because we’re all constantly looking for ways to grow,” he continues. “At this point in the cycle, there might be a bit more hesitation about new development, especially when it involves retail, which is out of favor. There just aren’t a lot of places to put your money.”
When an attractive deal comes along, particularly if it’s fully funded, “that’s where banks want to be,” he says. “The need banks have for funded assets has grown over time, not necessarily because of tax reform, but because of regulatory issues. Holding undrawn assets on their balance sheet is just not doable because of the way they have to put capital against that. Today if you have assets on your balance sheet, you want them to be earning money at LIBOR plus a spread.” Deals that fund up quickly, as much as those that come with known borrowers, are the sweet spot today, he says.
So as talk persists of some sort of 2019 economic event, even one that’s short and shallow, what is the outlook? “It’s hard to see what’s up for next year,” he says. A correction would certainly make an impact. But that, he says, is a possibility for the latter part of 2019. When we swing into the New Year, “everyone will have their budgets kicked back to zero [percent] again, coming off a record or near-record production year, and they’ll be looking for ways to do deals. So I don’t think a lot will change in the beginning.”
And if there’s a correction? “All bets are off,” he says frankly. “At that point, people will react in different ways depending on how they’ve positioned their portfolio and how much stress they’ll be under. When we came out of the financial crisis, PNC was among only a handful of lenders with a fairly clean portfolio. If there’s a correction, we like to believe we will again.”
Please read the PNC General Disclosure .
Michael D. Thomas is an Executive Vice President of PNC Bank, NA, and Senior Managing Director of PNC Capital Markets LLC. Within Capital Markets, he manages the real estate and business credit loan syndications teams and is responsible for product strategy and loan originations in each of these businesses, in addition to the distribution of real estate loans. Thomas also works closely with the corporate securities group to provide additional capital markets products to PNC clients.
Thomas is also a member of several strategic and operating committees, providing a capital markets perspective to PNC Real Estate’s decision makers.
Thomas has 25 years of banking and securities industry experience. He joined PNC Real Estate in 1997 as a vice president and relationship manager. In 1998, he joined the loan syndications group within PNC’s Debt Capital Markets group. He assumed responsibility for managing the real estate business in 2004 and the asset based lending business in 2018.
Prior to joining PNC, Thomas worked for another major financial institution, providing advisory and capital raising services to corporate, institutional and real estate clients.
Thomas received his bachelor of arts degree in economics from Yale University in 1993 and maintains his NASD Series 7, 63, 79 and 24 securities licenses.