Oaktree Capital Management, on behalf of certain of its private equity funds, has securitised a group of nonperforming loan (NPL) portfolios for the first time in its history. The $195 million offering, which was rated Baa3/BBB by Moody’s Investors Service and Fitch Ratings in September, closed at the end of last month and was oversubscribed. The Class A notes, which are backed by 91 performing loans, 595 NPLs and 78 real estate owned (REO) assets, were purchased by multiple undisclosed institutional buyers.
Oaktree has been one of the most active buyers of NPLs and subperforming loans, typically purchasing the loan pools from small independent banks as well as the Federal Deposit Insurance Corporation. Since 2010, the firm’s real estate and opportunity funds have acquired nine commercial real estate portfolios of performing, subperforming and nonperforming assets – with a total face value of $2.3 billion and backed by 1,811 loans – at an average of 39 cents on the dollar.
The loans comprising this securitisation had been acquired from banks by Oaktree’s real estate and corporate opportunity funds since early 2011. To return capital to investors, the firm is using securitisation as a financing vehicle, where the proceeds from the sale of the notes will help to repay investors in its funds.
Oaktree “saw securitisation as a perfect exit strategy, as a way to finance purchases and return money to investors,” said Philip Feder, head of the global real estate practice at law firm Paul Hastings, which represented Oaktree in the offering. “Their timing was pretty ideal in engaging the market, given the current interest rate environment, which is low, and the appetite of institutional investors for this sort of securitisation package.” Indeed, institutional buyers are looking for yields that are more attractive than that of U.S. Treasuries, and returns through securitisation are expected to be higher than those generated through U.S. Treasuries, he explained.
The Oaktree securitisation follows similar transactions by Rialto Capital, which closed on a $132 million offering backed by 282 loans and 38 REO assets in April, and Square Mile Capital Management, which completed a $159.5 million offering backed by 26 loans and five REO properties during the summer.
Securitisations have been more commonly associated with newly originated loans, as in the case of commercial mortgage-backed securities, where the investors earn back their capital through the cash flow of mortgage payments. In the case of NPL securitisations, however, returns would be generated through the liquidation, resolution or restructuring of loans. Generally, much of the capital that is returned to investors would come from quicker-to-resolve loan situations, while the equity for sponsors would come from slower-to-resolve cases. Most of the Oaktree loan pool is expected to be liquidated through foreclosure or other resolution, which ultimately would lead to the sale of the underlying real estate properties.
Newport Beach, California-based Sabal Financial Group will serve as the asset manager for the portfolio and will be responsible for developing and implementing asset plans; managing the REO assets and loans, including the execution of restructurings, modifications, workouts and liquidations; and responding to loan defaults and other extraordinary servicing matters, among other duties. Oaktree purchased a 50 percent stake in Sabal – formerly the small-balance construction loan unit at IndyMac Bank – in 2009 to build its own servicing and asset management platform.
“There’s an asset-specific plan for each of these loans, whereby the asset manager in coordination with Oaktree will decide the best resolution for that particular asset,” said Christine Spletzer, head of Paul Hastings’ securitisation practice. “Everyone knows the Day 1 game plan is to resolve them and to pay back investors relatively quickly from the proceeds of the asset resolution.”
The loan pool – comprised mostly of mortgages with an average balance below $1 million – consisted of 411 borrower relationships and has significant concentrations in the Midwest, Southeast and West Coast. The underlying assets included commercial and multifamily properties; residential and commercial land; and single-family residences and lots.