Anyway, let’s get into it.

The good kind of offices

Offices were supposed to be the scary part of the CRE universe, and with good reason. Hit by a double whammy of post-pandemic WFH and hybrid, and underwritten at cap rates that rapidly sunk beneath risk-free rates, office = bad is standard wisdom.

Several anchor tenants are leaving London’s flagship Canary Wharf district, leading to much chin-stroking over whether towers can be refitted into life science and apartment hubs. Tenants are disinclined to take more space — even if their buildings are rammed on a Wednesday, offices might be almost empty on Friday, so expanding footprints feels like an extravagance. Landlords have responded with optimistic projections for future rent increases which will dig them out of the hole if they can get just a little more time; deep pocketed sponsors of trophy buildings may have to throw in more equity.

But Blackstone, almost single-handedly keeping the lights on in European CMBS, is approaching the market with a new office financing, according to an SEC 15G filing published last week (suggesting the deal will come in 144A format).

Bank of America and BNP Paribas are leading Hera Financing 2024-1, according to the filing, which will be backed by flexible working office space within The Office Group — merged with Brockton Capital’s Fora Group last year and now the largest flexible landlord in London, outstripping even WeWork (9fin’s landlord!).

This could be quite a chunky trade — per the group’s accounts (extract below), it’s been working on a £597m refinancing timed for August 2024, which will replace all existing debt facilities. The 15G filing suggests 19 assets will form the collateral package, making it a substantially more granular portfolio than almost any other office CMBS.

There’s no deal structure out there yet, but this is a fundamentally different proposition from the standard “clip coupons on a big tower” deals of times past. Those deals separated asset management from sponsor, while a secured deal backed by flexible offices looks more like the financing for an operating asset. The Office Group needs to keep tenants happy, keep reletting, and keep managing its property portfolio, and bondholders may well be exposed to these capabilities.

A prudent sponsor (and there are few with more experience arranging CRE financing than Blackstone) would also bake in some flexibility to a financing structure like this — the Fora/Office Group business is growing rapidly and presumably will buy more buildings going forwards, so much better if it can add collateral into an existing funding platform rather than cobbling together further piecemeal acquisition facilities as it buys new assets.

The key thing, though, is probably the growth. As traditional anchor tenants downsize, there’s more and more demand for hybrid and flexible solutions. Workers that want office facilities near their homes or near their clients, rather than at HQ. Remote workers that want an occasional conference room. Startups whose growth (or downsizing) makes them reluctant to commit to long term leases.

It’s the WeWork business, without all the woo-woo stuff and the megalomania — and it’s a good asset class to see in securitised format.

It’s all Greek to me

My last column before heading off for August raised the question of whether bankers do it better, and yielded an ample mailbag!

Anyway, the very day it landed, Philip Aldis, who ran international mortgages and FICC structured investing at Goldman Sachs, left the US bank to join Apollo as a partner in its asset-backed operations, which I think proves the point?

This stretches the thesis a little — Goldman’s mortgage operations were already set up as a principal trading desk, buying portfolios of performing and non-performing assets when they’re available, setting up or funding originators, deploying tactical balance sheet, exiting via securitisation or secondary sale. Aldis didn’t move from an origination seat to an investing seat exactly, more from one kind of investing seat to another.

Apollo itself also has plenty of senior-type capital around, courtesy of its two captive insurers, and every Apollo earnings call emphasises the firm’s focus on investment grade “capital solutions” deals; it’s not just a question of equity tranches with as much leverage on as possible.

The Goldman memo announcing his departure credited his role in “a number of large mortgage intermediation transactions”, presumably meaning essentially buy-securitise type transactions.

Examples off the top of my head include the 2016-era Project Walnut (Swancastle), the legacy debt consolidation second liens bought from Barclays. I wrote about this at my old shop, but one presumes that a trade that’s large and lucrative enough to merit an individual mention on the group earnings call helps make a strong partnership case!

More recently, Parkmore Point comes to mind; the deal securitises the loans kicked out of the Kensington portfolios, and came to market as part of Blackstone / TPG’s exit of their investment in the UK’s largest non-bank lender. Goldman also bought and securitised several books of beaten-up Irish mortgages, but never really touched flow assets — there are a bunch of outstanding GS facilities funding businesses like Casavo, an instant-home-buyer / proptech.

Over at Apollo, we wonder what’s become of the Prinsen RMBS programme. The debut deal for what was billed as a new Dutch RMBS shelf was prepared in 2021, issued in 2022 (execution suffered a little from the torried 2022 conditions)… and then nothing.

The Prinsen No. 1 deal funded mortgages bought by Athora, Apollo’s captive European insurer, via the Merius platform. Merius is owned by CMIS, which is tangled up in the ugly EMAC situation (which saw a court hearing in July, still waiting on the published judgement)…. but even at the time when Prinsen came to market, investor materials flagged that Athora had funded €1.65bn via this route, leaving plenty left to fund in the market.

Per the deck, “Following the envisaged sale of the Portfolio to Prinsen Mortgage No. 1, the Athora Group will continue to hold a balance of €692.7m of Merius-originated RMLs, of which €430.3m will be held by Athora Belgium and €22.9m will be held by Athora Germany.”

Potentially the rising rates from 2022 kicked away the economic rationale for funding these assets via securitisation; Athora has its own resouces, and no need to touch the market if the levels aren’t right.

We also note that Apollo has finally started firing up its UK asset purchases through Foundation Home Loans.

It bought the UK specialist lender in 2021 through its Athene insurer, leading to widespread expectations that the FHL origination flow would disappear into the asset-gathering maw of the insurer. And then….. nothing much happened for more than two years.

FHL continued to fund through much the same arrangements of warehouse lines and securitisations as before. Higher rates, especially in the US, meant Athene had many more attractive opportunities available than UK BTL mortgages, and, once the wobbles of summer 2022 were over, FHL had its usual repeat-issuer following in RMBS markets. When execution was uncertain, FHL was just as happy to turn to Pimco, frequently pitted against its shareholder for other portfolios, to get a preplaced transaction away.

But in 2023 that’s changed, with a forward flow into “affiliate entities” plus a third party challenger deal as well.

Honey we lost the receivables

Gedesco has been a matter of interest for a couple of years now — performance in the Spanish SME lender’s main distributed securitisation, Gedesco Trade Receivables 2020-1, fell off a cliff in early 2023 as the deal exited its revolving period, and hanging over the whole situation is an ugly transatlantic legal battle between JZI, the private equity firm which owned the lender, and former JZI partners who managed Gedesco.

The very serious allegations on both sides of the lawsuit made it difficult to parse what actually occurred. Was the deal basically sound, but the legal troubles made it impossible to refinance? Was the collateral kind of cuspy and adversely selected, such that any sniff of legal problems was sufficient to blow it up? Or was the whole enterprise a nest of self-dealing and fraud, as alleged by the initial JZI court submissions?

The pool contained quite different collateral formats, which seemed to have very different performance characteristics — the factoring facilities were pretty bad, but the larger cap promissory notes seemed good, as of last year — and performance recovered enough by year-end to see the class A note paid down.

But this summer an update from the issuer suggests there’s not much reason for optimism on the rest of the portfolio.

“The Issuer understands that a lot of the underlying documentation relating to the Portfolio is missing. According to the information the Issuer has been provided with, many of the Receivables are alleged to be ineligible for the securitisation (e.g. transactions with related parties), or are alleged to be non-existent, already paid or otherwise irrecoverable. The aggregate amount of the allegedly ineligible, non-existent or irrecoverable Receivables appears to be very significant and, as a result, potential recoveries in respect of such Receivables are uncertain and will be dependent on factors which are presently difficult to ascertain.”

That’s about the worst thing you can hear from a servicer, and raises questions for the various transaction counterparties.

It’s difficult for standard DD to uncover determined fraud, but in what sense does the non-existent receivable not exist? Is it a receivable drawn on a non-existent company? A receivable for which no documentation exists? A fake receivable drawn on a real company? Factoring and supply chain financing can be an attractive spot for fraud, because the documentation requirements are that much lower. Got a PDF with numbers and a letterhead on? You’ve documented your first receivable! Much harder to generate an entirely fictional mortgage with a charge over specific tangible property.

There are further twists. Gedesco Group is now in insolvency, and according to the notice, the insolvency administrator has accused former director Mr Aynat of making “at least €336.6m allegedly disappear from the Insolvent Companies”.

It’s hard to determine quite how large the Gedesco Group was, but the securitisation was its main financing facility and that was XYZ at new issue, so this figure could be materially above the total balance sheet of Gedesco. Quite something.

Toro Finance, a linked company which shared some management, though had different shareholders, has been up for sale via A&M.

Despite the messy history, this was a separate entity from Gedesco, and earlier this year, Gedesco was also cut out of servicing for Castilla Finance, a private securitisation, following a consent process from noteholders.

The legal tentacles of the situation still extend, however. “According to the information the Issuer has been provided with, there has been a de facto closure of the Gedesco Group companies and an alleged transfer, which is alleged to be wrongful, of the business and assets of these companies to Toro Finance, S.L. (“Toro”)”.

Gedesco itself might be essentially gone, but it’s still causing a lot of trouble.

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