Värde Views: The Covid Echo Cycle

As the delayed impact of the unprecedented policy response to Covid plays out and concerns around stagflation take hold, exacerbated by the severe economic consequences of the war in Ukraine, Värde Partners’ CIOs Ilfryn Carstairs, Giuseppe Naglieri and Brad Bauer reflect on the emerging possibility of a rapid “Echo Cycle” and its implications for the credit opportunity set.

Download Värde Views here.

Värde Views: Credit Market Update

With heightened volatility and increased dispersion across markets, Värde Partners’ CIOs Ilfryn Carstairs, Giuseppe Naglieri and Brad Bauer provide their thoughts on the economic conditions affecting the investment landscape, the evolving opportunity set and the outlook for credit markets in 2022.

Download Värde Views here.

Värde Views: Credit Market Update

With market volatility driven by the surge of the Delta variant, U.S. politics and other factors, amidst a continued global vaccine rollout and positive advances towards a new normal, Värde Partners today shares views on the current economic conditions affecting the investment landscape, the evolving opportunity set, and the outlook for credit markets.

Download Värde Views here featuring commentary from Värde Partners’ CIOs Ilfryn Carstairs, Giuseppe Naglieri and Brad Bauer.

About Värde Partners
Värde Partners is a leading global alternative investment firm with roots in credit and distressed. Founded in 1993, the firm has invested $85 billion since inception and manages $14 billion on behalf of a global investor base. The firm’s investments span corporate and traded credit, real estate and mortgages, private equity and direct lending. Värde employs more than 300 professionals worldwide with offices in Minneapolis, New York, London, Singapore and other cities in Asia and Europe. For more information, please visit www.varde.com.

Värde Views: Credit Market Update

Värde Partners today shares an update on the economic conditions affecting the investment landscape, the evolving opportunity set and the outlook for credit markets as Covid-related tail risks continue to diminish, and the path to a new normal begins to take shape.

Download Värde Views here featuring commentary from Värde Partners’ CIOs Ilfryn Carstairs, Giuseppe Naglieri and Brad Bauer.

About Värde Partners

Värde Partners is a leading global alternative investment firm with roots in credit and distressed. Founded in 1993, the firm has invested $80 billion since inception and manages $15 billion on behalf of a global investor base. The firm’s investments span corporate and traded credit, real estate and mortgages, private equity and direct lending. Värde employs more than 300 professionals worldwide with offices in Minneapolis, New York, London, Singapore and other cities in Asia and Europe. For more information, please visit www.Varde.com.

Getting Comfortable with CRE CLOs

One of the many casualties of the financial crisis was the size of the commercial mortgage backed securities (CMBS) market. These securities, which were typically issued by bulge bracket banks, were a major source of financing for the commercial real estate (CRE) industry prior to the crisis. But as banks were forced to tighten their balance sheets in response to increasingly strict regulations and capital requirements, many pulled back from the CMBS market.

According to the Commercial Mortgage Alert, CMBS issuances during 2017 totalled $95bn, a far cry from 2007 when an all-time high $230bn of deals were securitised. Top CMBS lenders predict that CMBS volume will continue to shrink in 2018, dropping to as low as $75-$80bn.

This decline created a capital gap for real estate investment firms and property developers that depend on longer-term fixed rate conduit loans to fund acquisitions and other growth-oriented deals. Fortunately over the last few years, non-bank lenders have stepped in to fill the void as a source of capital for the CRE market. However, instead of copying the banks’ business model and continuing to offer long-term fixed rate loans, these non-bank lenders have filled a different need by offering shorter-term floating rate loans to ‘bridge’ a borrower’s business plan to either a sale or a longer-term refinance option such as CMBS. These loans can then be aggregated by the non-bank lenders and sold into the capital markets through a CRE CLO.

These CRE CLOs, which are a hybrid of a traditional CMBS and a corporate CLO, are fundamentally different than what bond investors may be used to from pre-crisis times, in part because the issuers (i.e., non-bank lenders) are not solely focused on generating fees but rather on using these transactions as a financing tool for their business. Notably, instead of selling the whole loan into a trust and realising the gain on sale, the aforementioned financing angle means the issuer is typically retaining the below investment grade bonds, assuming the first loss position instead of selling it to a third-party ‘B-piece’ buyer. This approach creates an alignment of interests between issuers, bond investors and borrowers, helping ensure each party can meet its objectives through the transaction.

As a result of this and other factors, CRE CLOs are becoming more widely understood and are now attracting strong demand from bond investors, who continue to search for yield and are attracted to the floating rate nature of the product, yet want to stay shorter-dated based on where we are in the economic and commercial real estate cycle.

Värde Partners closed a CRE CLO in February, which is one of six CRE CLOs this year, totalling a combined size of $3bn. To further understand the investment opportunity and what bond investors should know about CRE CLOs, this piece will provide answers to four important questions.

Why is the current market environment favourable to CRE CLOs?

To answer this question, one needs to look at underlying CRE fundamentals which drive demand for CRE loans, which ultimately are contributed into CRE CLOs. The CRE market has largely recovered since the financial crisis, buoyed by strong US and global economic growth. According to a recent RCA US Capital

Trends Big Picture report, CRE transaction volume in the third quarter of 2017 came to $114bn, making it the 13th straight quarter to pass the $100bn mark. As a comparison, the 10 quarters between Q2 2008 and Q3 2010 failed to pass even $50bn in CRE deals.

Additionally, CRE prices have steadily increased every quarter, according to data compiled by the Federal Reserve Bank of St. Louis. This increased level of transactions means increased lending opportunities. Although there is growing trepidation that the nearly 10-year-old bull market may have peaked, we believe there is still room for CRE prices to grow. This is particularly true of ‘non-gateway’ (or secondary) markets that may not have rebounded as quickly. According to RCA, the six largest ‘gateway’ CRE markets have seen CRE values rise 44% above [2007] vs all other US market which are up only 9% above 2007 levels.

As a result of this growth in short-term floating rate CRE lending by non-bank lenders, CRE CLOs have also enjoyed strong growth during this period. CRE CLO issuance, peaked with a post-crisis supply high of $8bn in capital raised across 19 deals in 2017, representing a nearly fourfold increase in issuances in 2016, according to data from Moody’s. This activity is expected to continue into 2018 as bond investors become more familiar with the asset class and the tailwinds fuelling its growth.

How are CRE CLOs today different compared to pre-crisis CRE CDOs?

The CRE CLOs of today offer a number of structural advantages. For one, these types of CLOs are typically backed by first-lien whole loans, which offer improved collateral and require less leverage than the ‘kitchen sink’ of products contributed to legacy CRE CDOs.

In addition, CRE CDOs of the past were typically ‘managed’ in nature, allowing collateral managers to actively buy and sell the underlying exposures during a revolving period without a well-defined box of what managers could purchase into the structure.

CRE CLOs today are largely structured as ‘static’ transactions with a defined pool of assets that investors can underwrite upfront. Any deals structured as ‘managed’ have well-defined, tight standards of what could be purchased as the initial assets repay.

Today’s CRE CLOs also offer improved alignment between investors and issuers in that issuers are required to abide by risk retention rules to maintain at least 5% of the structure’s value or place it with a ‘B-piece’ which is typically a sophisticated mortgage investor. Market practice has largely been to maintain all of the below investment grade bonds by sponsors.

Why may bond investors find CRE CLOs attractive?

Investors looking to optimise the fixed-income portion of their portfolio have a universe of options to consider. With some market indicators suggesting we may be near the end of the credit cycle, many investors are concerned about their fixed-income investments and are seeking shorter duration assets.

For these investors, the CRE CLO market offers several advantages over other fixed-income instruments that should help to allay those concerns. For one, these CLOs tend to be short-term in nature with short-duration cash flows of only two to three years, compared to 10 years or more for a typical CMBS. This helps limit bond investors’ exposure, and therefore risk, should the credit cycle unexpectedly flip.

In addition, these CRE CLOs tend to be backed by strong collateral in the form of CRE properties such as office buildings, multifamily apartment buildings, industrial properties and flagged hotels.

When compared to legacy CRE CDOs where bond investors may have had trouble understanding the underlying collateral, CRE CLOs are transparent and easier to evaluate.

What should bond investors look for in a CRE CLO?

Like many investments, bond investors should know that no two CRE CLOs are going to be alike. But there are several qualities or characteristics of CRE CLOs that may indicate a potentially attractive investment opportunity.

First, bond investors should consider the background and expertise of the issuer. An issuer with deep credit and CRE expertise is important given the hands-on nature of the collateral that often requires both real estate knowledge and asset management capabilities to underwrite and work through business plans with the borrower post-closing. An issuer’s track record, platform capabilities and historic performance are thus critical.

Second, bond investors should evaluate the underlying loans in the CLO to ensure it is properly diversified across property types and geographies. For example, a CLO providing significant exposure to retail CRE properties likely carries significantly more risk than investors are looking for in today’s market. Similarly, a CLO with significant exposure to a particular geographic area may be susceptible to local economic changes and swings.

Finally, bond investors may consider looking for institutional asset managers who have stable capital and are likely to be repeat issuers of CLOs. It goes without saying that most investors conduct extensive due diligence on any potential investment opportunity, including evaluating the issuer and its platform. If an issuer has an established track record in the capital markets, investors will be able to focus their due diligence on evaluating the collateral of each deal.


The CRE CLOs of today are drastically different than the CRE CDOs that were prevalent before the financial crisis and may offer a shorter-term more attractive yield vis-à-vis CMBS. Bond investors looking to diversify their portfolios and increase cash flows should look carefully at CRE CLOs as a potential source of strong risk-adjusted returns.

Written by Missy Dolski and Jim Dunbar, members of Värde’s Mortgage team. Originally published by Alt Credit Fund Intelligence.

Värde Partners, A Building Empire

In October, Värde Partners, probably best known to Alt Credit readers as a buyer of distressed debt, announced plans for its portfolio company Via Célere to acquire land bank assets of another Värde company, Aelca, to create the largest home builder in the coun­try, with a gross asset value of over €2bn. The move is the latest in a string of deals which had begun well before the firm opened its Madrid offices in 2014.

Alt Credit (ACI): How did Värde come to be interested in the Spanish real estate market?

Francisco Milone (FM): We are value investors and we are trying to buy assets at a discount to their intrinsic value. To do that, we’re always looking for motivated sellers and to access assets in sophisticated ways, allow­ing us to solve for complexity. The reward for that is the potential to get a good asset at a discount to its market value.

One way to do this is buying loans against assets, so we will buy NPLs. When we access an asset, we want to own that asset and create it in the cheapest possible way, whether that means holding the loan or converting it into equity. The most important thing is holding real estate assets.

Banks are very often motivated sellers, because regulation has increasingly put them under pressure to dispose of assets that are non-core, and they are not in the business of turnaround assets.

ACI: Was it always the plan to become a homebuilder in such a big way?

FM: Absolutely. Typically, before entering a new country, we take a business plan into committee which will address why we think the country is interesting, the two or three key themes that we think are driving the opportu­nity in the country, and the investments that the firm has to make to develop the business in the country.

When we enter a country, we seek to do so in a differentiated way to add value, but also in a sustainable way meaning that we will continue to be able to do deals in the coun­try for the long term. Värde had already gone through the same process in the UK, starting in 2008. We bought land, restructured a home building company, developed housing and eventually led to an IPO five years later.

We took a lot of what we had learned from that process and applied it to Spain in 2013. The regulators were putting pressure on the banks at that point. We started looking in 2011, when regulators began putting pressure on banks, the FROB (fund for orderly bank restructur­ing) was created, which was the catalyst for banks to restructure their balance sheets.

ACI: Why did Spanish housing stand out as attractive in particular in 2013?

FM: Part of our philosophy is being very deliberate in identifying countries and themes that we think are interesting.

In the Spanish economy, there were a few important economic factors. In the peak of the market, a disproportionate amount of the economy was dedicated to residential devel­opment in 2008-2009, so banks were overly exposed.

Many got completely wiped out because they were over levered and not particularly knowledgeable. The country went from building 600,000 homes per year at its peak to 40,000 at its worst. On the other hand, the Spanish government seemed to be doing broadly the right structural reforms. Unem­ployment back then was over 20%.

We thought there was a lot of potential for the economy to grow and to outperform and that high unemployment provided a big buffer in terms of the economy overheating, which is important for home building.

The other interesting thing about Spain was that banks were going to enforce a lot of loans, or own loans against land, and so we’ve been buyers of land where it’s not really in the seller’s business model to develop land.

ACI: Why build the homes yourself and not stop at buying NPLs?

FM: If you don’t build a housebuilder, and you buy a lot of NPLs, then you’re relying on someone else to bail you out of the land. The shape of that trade is much less interesting. If you’re a builder you can be a buyer of land and a seller of homes at the same time.

As a real estate investor that understands residential, knows how to deal with loans, and has bank relationships, building a house­builder was a better way to invest for us. An advantage of this strategy is that the market and the public is much more amenable to a portfolio of loans being sold to a homebuilder, as opposed to a fund or a bank.

ACI: How did you actually go about the process?

FM: On a practical level, we opened an office in Madrid in 2014, and hired Hector Serrat who had worked in real estate-focused private equity. We now have a team of four in Madrid, and I travel back and forth, having put over a billion to work so far.

On the homebuilder side, the first thing we did was look for a good land bank. We cre­ated a company called Dospuntos by buying out the property development of the San José Desarrollo Inmobiliarios structure, which was acquired from Grupo San Jose. We then did some restructuring, and merged it with a company called Via Célere. We brought in new management and did a series of capital increases to fund the company and buy more land. We then scaled another platform for buying land through NPL sales, called Aelca, which has been a pretty significant buyer of loans from Spanish banks for more than two years now. We recently merged Aelca and Via Célere, creating the biggest home builder in Spain based on ready-to-build units with $2.5bn in gross asset value.

On the loan side, the first meaningful transaction we did in Spain was with Banco Popular to enter into a joint venture with their servicer, which was managing over €20bn of NPLs at the time and non-core assets on behalf of the bank. That was a sustainable way to learn about the market. It was an asset light transaction that gave us access to over €20bn of non-performing assets. We really started ramping up building our direct exposure a year later.

ACI: What is next?

FM: There’s still plenty to do in Spain. Over­all, homebuilding volumes are still low. We believe in the economy and story and the mar­ket is still fragmented, so the biggest builders should get bigger. If you compare Spain to the UK, in the UK the biggest public listed build­ers make up around 40% to 60% of the market.

The two public-listed companies plus us would make around 20% of what should be getting built at the moment, so the market is still growing, and we believe our share of it still has room to grow. The majority of inter­national investors just want to buy property around Barcelona and Madrid, because if you fly in from New York, that’s where you go. Having a local team in Spain helps us buy land in places others don’t.

If you’re local, you’ll understand the market dynamics in Zaragoza, Marbella, so it moves less from a financial transaction to a general property development company. We’re build­ing homes for people to live in. The only thing we’re not focused on is second homes and foreign owners.

ACI: And outside Spain?

FM: We’re using the same approach in Italy, but that market is about two years behind where Spain is and the circumstances are different. Italy does have interesting niches of residential opportunities, such as in Milan and Rome, but we were never going to put $1bn to work in the residential market in Italy.

The hotel market on the other hand is very interesting. Italy has a lot to offer tourists which makes it a strong market for owning hotels. There are many family-owned busi­nesses, over levered and under invested and a lot of those have non-performing loans. Sim­ilar to the Spanish residential market, there’s also a lack of good operators. The market is relatively underpenetrated by global chains and brands.

In Portugal, we just announced the acqui­sition of a real estate asset manager called Imopólis. Consistent with our approach in other countries, we’ve identified specific themes to guide our investing. We think that commercial real estate and office space is particularly attractive given recent economic growth has led to a supply-demand imbalance in that market.

Outside Southern Europe, India is again another few years behind the Italian market. We’re in the process of growing our team there and we have only just opened our first office in Mumbai.

ACI: Have you started your Italian pro­cess the same way as Spain?

FM: Not exactly, because the story and the assets are quite different. For example, NPLs in Spain were largely backed by mortgages, so you really had to be a residential developer.

In Italy, the pools are much more mixed, with much smaller assets, so we believe the key is actually being a loan servicer, which is why we bought a stake in Guber Banca SpA. We’re helping them grow, and they are now licensed to be a bank and so they can raise their own capital and deposits to buy NPLs.

It also helps that Italian banks will prefer to sell to another local bank. We think Guber will have an active role to play in solving Italy’s NPL problem.

ACI: What have you learned from Spain that you can take to Italy?

FM: The name of the game investing in Southern Europe is having a local team, but also being well linked up with the head office. It’s crucial to have that team on the ground who speak the language and know the culture, but you also don’t want to have your investment committee in a black box in New York somewhere that’s making all the decisions, so that communication line is vital.

Originally published by Alt Credit Fund Intelligence.