Investors seek off-market opportunities as competition rises for distressed assets

Mounting competition in the distressed space is causing some fatigue among investors because of the large amount of time and money spent carrying out due diligences, according to panellists at the PropertyEU Distressed Investment Briefing hosted in London earlier this month.

Ari Danielsson, managing director of specialized loan servicer Reviva Capital, reckons that an increasing number of players are shunning the auction type of sales and are seeking to secure product on an off-market basis.

‘In general there is much more capital than product at the moment,’ said Danielsson, who at Reviva manages around €1.5 bn of debt. ‘Everyone hoping that deals will flow in large quantities in the short term, will be disappointed. There is a despair of actually putting the capital to work and investors are trying to go below the radar. The dream deal for any distressed investor would be a bilateral loan acquisition, where you deal directly one-on-one with the seller.’

Market experts agree the best way to access product is to go directly to the banks and show interest in acquiring a specific loan. ‘There is a lot of hung CMBSs from 2007 and 2008, often of up to €500mln, that have been left with the original underwriter of the loan. An intelligent way to access product would be to try and get one of these positions by going to talk to the bank and starting a bilateral negotiation,’ added Jos Short, founder and executive chairman of Internos Global Investors.

However, many would-be sales of existing CMBSs are being held up by low standards of documentation. Investors often do not know what the contractor’s position is before acquiring the notes or have no access to the terms of the inter-creditor agreement.

‘For some of the old CMBSs, underlying documents were not made fully public,’ commented panellist Daniel Ryland, a partner at SJ Berwin in the UK. ‘It might happen that you buy notes but you are not fully aware of the terms of the inter-creditor agreement which is fundamental in knowing how to exercise your rights. Plus, quite often you would not know who the bondholders are because over a period of time, notes are held by a whole range of different investors.’