Role in Adelphi and Intu loan deals heralds newcomers’ senior debt push, reports Jane Roberts
Aalto Invest is a new face in the increasingly crowded line-up of senior debt investors, but it hasn’t taken this independent asset manager long to establish its credentials.
The London and Swiss-based firm began investing this year for a commercial real estate loan programme, on behalf of a select number of existing pension-fund clients that have committed £400m to the new strategy.
The first two investments, in April and May, were a participation of around £20m in retail REIT Intu’s £350m senior secured loan, part of a wider £1.15bn refinancing, ranking pari passu alongside a bond issue; and a slice of a £190m Morgan Stanley loan to Blackstone for its acquisition of London’s Adelphi office building.
Aalto’s main target markets are the UK and Germany, with an opportunistic strategy in France and northern Europe. It will buy core and core-plus office, retail and logistics assets at loan-to-value ratios up to 65%. The target return, including amortisation of upfront fees, is Libor plus 350 basis points.
The loan margins on the first two deals – rumoured to be 400bps over Libor on the Adelphi loan, and on the Intu loan 300bps for a 50% loan-to-value ratio – seem to meet the investors’ return targets comfortably.
The portfolio co-managers for the programme are Finn Mikko Syrjanen, who joined Aalto three years ago from Cheyne Capital, and Matthew Pritchard, who joined last year from Deutsche Pfandbriefbank, where he’d been head of structured products.
“We are seeking Libor plus 250-400bps,” Syrjanen says, stressing that the firm’s fixed-income clients are driven by minimising risk, rather than maximising yield, and invest in senior debt only, not whole loans.
By keeping close to the banks, Aalto has amassed a £20m-£60m pipeline of participations. “We’re happy to form clubs with one or two banks and a lot of banks now understand what we do,” he says. “Banks are very relationship-focused and sell other services. A client may need to borrow £150m and Bank A may have a £75m limit on that deal. So rather than go to Bank B and lose the exclusive relationship, we can be a private participant, though with certain control rights. We also like to work with mezzanine lenders where we each have a clear role in the capital structure.”
A higher yield for fixed-income investors
Aalto’s role in its fixed-income investors’ strategy is to get a slightly higher yield on investment-grade risk than the investors get on investment-grade corporate debt.
“Those investors are starved of yield,” says Syrjanen. “We offer Libor exposure, so they don’t have to worry about rising interest rates and investment-grade product, so they don’t have to go down in credit quality for yield, as they would with corporate bonds. But they have to accept illiquidity and that the loans are unrated.”
He particularly likes the Intu deal, which was oversubscribed, where the holders of the unrated, five-year bank debt have picked up 1% more yield than the 10-year bondholders for half the hold period. “It’s picking up a higher yield for the illiquidity,” he notes.
The Adelphi loan shows Aalto’s willingness to consider a bit more property risk. The main tenant leaves this summer and Blackstone plans a £20m refurbishment.
“We like to think we have deep investing knowledge in relation to some specific real estate markets, given our other investments over the past 10 years,” Syrjanen says. “We still see particular value in financing assets with a ‘twist’ – for example, taking re-letting or repositioning risk, at moderate LTV levels, in partnership with an experienced sponsor.”
The firm believes it can invest the available capital in the next six to nine months, but it won’t chase deals. “At the recent Association of Property Lenders annual conference, the tone was positive,” Syrjanen says, with banks very keen to lend.
With this in mind, Aalto is raising more capital and targeting new fixed-income investors for the first time. This is where Jonathan Shaw comes in; he joined Aalto from Stormharbour Securities as head of investor solutions last December. They will not reveal the capital raising target, but it is believed to be a further £500m-£600m, taking the programme to £1bn.
Aalto’s commercial real estate loan strategy evolved from a relative value credit strategy that focused on senior CMBS since the onset of the financial crisis, “when investors got paid well for taking CMBS risk”, and again in 2011 when the Greek eurozone crisis hit, before selling out late last year.
“We asked: ‘do we return the capital?” Syrjanen recalls, “or do we do something else? And it turned into a decision to invest in loans instead.”
The firm has one other real estate strategy, co-investing with wealthy clients in a portfolio of US single-family homes, for a 7-8% income return and the prospect of capital growth as US house prices recover.
“New debt funds are a sexy topic, but Europe has been and will be a bank-dominated market,” Syrjanen says. “In relation to margin or price setting, what matters is what the German banks, Lloyds, RBS etc are doing. We can be a helpful partner for them and for mezzanine investors.”