Fortress Investment Group is tapping the securitization market for $600 million to finance bridge lending on commercial property.
This is not the private equity firm’s debut commercial real estate collateralized loan obligation; unlike several of its peers that issued for the first time over the past 12-18 months, Fortress issued its first CRE CLO in 2016, before the market was quite so red hot.
Fortress is taking advantage of investor euphoria for anything that is short-dated and floating rate. The new deal, FORT CRE 2018-1, has a number of bells and whistles that the 2016 transaction did not. For starters, it is actively managed, while the earlier deal was static. And Drawbridge Special Opportunities Fund, the Fortress affiliate that is managing the deal, has yet to identify all of the collateral.
At closing, the deal is expected to be collateralized by 19 whole loans and senior participation interests with an aggregate balance of $408.1 million (inclusive of four loans totaling $35.4 million that may be acquired on or within 30 days of the closing date), as well as $141.9 million in cash, and borrowings of up to $50 million under the revolving Class A-R notes.
The cash collateral can be used to acquire previously unidentified whole loans and senior participation interests, as well as funded companion participations relating to existing assets during the ramp-up period, subject to satisfaction of the eligibility criteria.
The Class A-R notes can be drawn upon to acquire previously unidentified assets as well as related companion participations during the first two years of the transaction’s life.
Kroll Bond Rating Agency takes a mixed view of active management; on the one hand, it can introduce risks not associated with the initial collateral. On the other hand, ongoing, proactive management of the assets can be an advantage, particularly in times of distress. In this transaction, the collateral manager is permitted to direct the sale of defaulted and credit risk assets throughout the life of the deal and can also exchange defaulted or credit risk assets for an asset owned by its affiliates, provided the exchange asset satisfies the eligibility criteria.
“While the collateral manager is prohibited from acquiring assets for the primary purpose of recognizing gains or minimizing losses due to market value changes, the ability to sell and/or exchange non-performing assets acts as a potential loss mitigant to the rated notes,” the presale report states.
The transaction represents the second CRE CLO for affiliates of Fortress. The first, FORT CRE 2016-1 (KBRA rated), was a static transaction that was issued in August 2016. In August 2018, KBRA upgraded three classes of notes (Class B, C and D) of this transaction. To date, no collateral losses have been associated with the transaction and no deferred interest was reported on the PIKable notes.
The new deal is also more highly leveraged than Fortress’ 2016 transaction. The initial mortgage collateral has a weighted average loan-to-value ratio, as measured by Kroll, of 122.2%. By comparison, FORT CRE 2016-1, had a KLTV of just 111.1%. However, the new deal’s leverage is below the average of 125.4% for the 20 CRE CLO transactions rated by KBRA over the past 12 months.
