Private credit has faced heavy criticism on many fronts, including global regulators and such financial figures as former Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase Chief Executive Jamie Dimon and Marathon Asset Management founder Bruce Richards. Yet, syndicated loans have regained some appeal.
Then again, there have been some moderating the concerns, including from CBRE and Dimon, following up by walking back some of his comments. Walker & Dunlop Investment Partners President Mitchell Resnick and Senior Managing Director and Group Head of Debt Geoff Smith addressed one potential answer, at least for multifamily.
They wrote that private credit is not a single thing but a "broad label" that includes corporate direct lending, real estate debt, specialty finance and asset-based lending. The category has "attracted significant capital" as banks retrenched and tightened their underwriting standards over higher default levels and tightening spreads. Liquidity concerns, particularly in semi-liquid structures, have come under increasing attention.
Private direct lending to corporations and multifamily bridge lending have different characteristics.
For corporate direct lending, the borrower is an operating company with an underwriting focus on business performance and valuation, including revenue durability, margins and competitive position.
Loans depend on enterprise value as a metric. Repayment drivers are market-dependent, whether refinancing or a sale. "In sectors like software, this can mean lending against projected growth with relatively thin coverage cushions," they wrote.
Downside protection is based on covenants and varies by deal. The primary risk is in the business and its valuation. But when performance weakens, covenants, documentation and control rights might offer lenders less protection than they expected.
Multifamily bridge lending is typically extended to single-purpose property-level entities tied to particular properties and related business plans. A loan is connected to a "specific asset, market, and transition strategy, such as lease-up, repositioning, or recapitalization," the Walker & Dunlop investment partners said.
A bigger difference between corporate direct lending and private lending to properties is in underwriting. In multifamily bridge lending, the underwriting is based on the asset: occupancy, rental trends, operating expenses, reserves, leverage and the plan to reach stabilization to throw off enough revenue to cover credit service. Asset cash flow and stabilization plans are in focus during the process, with such measures as debt service coverage ratio, cash-on-cash return and cash flow taking center stage.
Refinancing or sales can provide repayment, but there is also asset-driven stabilization and agency takeouts. The downside protection is structural and asset-based and the primary risk is based on execution and assets, as well as a local need for housing.
If a venture fails, there are structural features like first-mortgage security interests, cash management or lockbox mechanisms, debt-service reserves, completion guarantees and meaningful sponsor equity. These don't eliminate risk, but provide greater control over cash control, improved visibility into performance and more tools.
And the exit strategy typically depends on the asset. After property stabilization, takeout financing could come from agency lenders, permanent debt providers or a sale of the asset. The loans are also typically for limited times, rather than the potentially ongoing challenges of a company that often faces more open-ended challenges than with corporate entities.
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