It’s not just Arbor: Syndicator lender Ready Capital chokes on past-due debt

Days after multifamily lender Arbor Realty Trust reported a surge in delinquencies and a multi-billion-dollar effort to plug those holes, Ready Capital disclosed parallel pain points with a similar origin story: multifamily syndicators. 

In its first-quarter earnings release, Ready Capital, a go-to debt source for firms such as GVA and Tides Equities, reported 10 percent of its $6.6 billion bridge loan book — the short-term floating-rate debt favored by syndicators — was over 60 days delinquent. 

That’s a 284 percent increase from the same period last year.

CEO Thomas Capasse immediately pegged apartment properties as the problem asset in a Thursday earnings call, tying “credit impairment” to “late cycle stress in the multifamily sector.”

The sponsors behind much of that troubled debt are the value-add multifamily buyers that borrowed at floating rates, failed to finish planned renovations and now lack the revenue to pay their loans. Those borrowers often syndicate or pool equity from retail and institutional investors to buy property.

Arbor in the first quarter modified nearly $2 billion in loans to keep the blood off its balance sheet. The firm pushed out due dates and offered temporary rate relief if sponsors agreed to pay down principal, purchase new rate caps or plump up reserves.

Ready Capital wants to tap the same rescue strategy. One problem: It doesn’t have Arbor’s runway.

Both lenders issue a niche investment product known as commercial real estate collateralized loan obligations, or CRE CLOs. The securities comprise pools of bridge loans, many of them made to multifamily buyers.

For issuers, the upside of these CLOs is the flexibility. Many are actively managed, meaning a lender can pluck out delinquent loans and drop in performing ones to keep bondholders happy. 

Firms such as Arbor can also modify debt without getting a special servicer involved, a big timesaver in shoring up problem mortgages. 

Ready Capital, though, dealt in the other type of CRE CLOs: so-called static securities, which allow issuers less flexibility in addressing problem loans.

Ready Capital said it cannot move non-performing loans out of pools until they are over 60 days delinquent and needs the sign-off of a third-party special servicer to modify them, which has created “additional lag time,” Cappase said.

“We’re certainly encouraging them to have a greater sense of urgency,” Chief Credit Officer Adam Zausmer said of the special servicer.

Those obstacles have saddled Ready Capital with a $732 million backlog of modifications and caused five CRE CLOs to breach tests designed to protect investors who buy less risky portions of the securities.

Six months back, a Ready Capital CLO holding delinquent loans sponsored by GVA, breached an interest-coverage protection test built to track if loans are pulling adequate interest. Ready Capital then paused payments to the most junior investors in the CLO to reroute any cash flow to senior noteholders. 

To speed modifications and reduce delinquencies, Zausmer said Ready Capital is working to replace its special servicer with another firm. Ready Capital could also become its own servicer, though Zausmer said it would take six to nine months.

“[We’re] certainly exploring other alternatives to give us more flexibility as we work through the crisis here,” Zausmer said. 

In the meantime, the lender is looking to sell $655 million of loans, 70 percent of which “is in some state of delinquency,” Chief Financial Officer Andrew Ahlborn said.

The lender also took a $146 million valuation allowance against those loans, signaling the dollar volume of debt it expects will not be paid back. The provision drove its reported net loss of $74 million in the quarter.

On the call, Steve Delaney, an analyst with JMP Securities, asked to what degree the loan sale would knock out Ready Capital’s troubled debts and put it on a recovery track.

“What’s your confidence level that you’ve circled 80-90 percent of the problems you’re likely to have?” Delaney asked.

Executives didn’t respond directly but Zausmer pegged the move as a lesser of two evils.

Selling the loans and reinvesting the capital, he said, would offer a greater net present value than “absorbing legal costs to foreclose and carry costs to operate.”