Hudson targets borrowers buying back their own debt

Hudson Realty Capital is targeting recapitalisation deals with mortgage borrowers able to buy back their debt at a discount.

In addition to acquiring distressed mortgages directly from banks and other financial institutions, the New York-based debt and equity shop said it was also targeting borrowers in a position to purchase their own debt at a discount directly from their lenders

Hudson managing director Spencer Garfield said third party firms, such as Hudson and other private equity real estate firms, were less competitive in winning outright bids for distressed debt owing to the bid-ask spread.

There’s plenty of distressed debt on the market, it’s just that we are not willing to pay the prices needed to win the deals. There have been better opportunities in the first three months of 2010 than the whole of 2009. Hudson Realty Capital managing director Spencer Garfield

However, by going direct through borrowers, who are often in default to their current lenders or just over-leveraged, Hudson said it was “finding more traction” as borrowers’ had an “inside track” on the loans and the properties used as collateral, and established relationships with the banks. “It’s kind of a reset,” Garfield said, adding: “This a vibrant market and discounts are available that are attractive to private investors, such as ourselves.”

Hudson, which has several recapitalisation deals in the “pipeline” and is targeting low-teen-plus IRRs, said it required the borrowers to commit new equity to a buy back of a renegotiated loan at a lower face value. The deal enables the borrower to recapitalise the properties appropriately with the necessary capital expenditure, renovation, tenant improvement and leasing commission budgets.

Recapitalisation deals like those targeted by Hudson are becoming increasingly prevalent among opportunity fund managers, after the expected flood of deeply discounted debt deals failed to materalise. With many banks, borrowers and sellers unwilling to fully write down property valuations, Garfield said the opportunities available today were different to those first anticipated at the start of the credit crisis.

“There’s plenty of distressed debt on the market, it’s just that we are not willing to pay the prices needed to win the deals,” Garfield said. Deal flow in 2010 had improved dramatically compared to 2009, he added, saying: “There have been better opportunities in the first three months of 2010 than the whole of 2009.”

But Garfield warned 2010 still wouldn’t be a year to rush into investments. “You don’t want to go out there and make a mistake. There really is no rush, this will be a long period of distressed investing, perhaps up to three to five years. It’s about being selective and cautious.”

Hudson is also eyeing other recapitalisation opportunities, including providing subordinated debt or preferred equity to fund-level general partnerships; originating bridge loans and also bank-related investment opportunities.