I perhaps have a well-earned reputation for an excess of fascination for risks, downside, black swans and other things that prevent the good times from rolling.  Lover of Schadenfreude.  I hope not, but I do often feel compelled to point out risks that seem to be overlooked. 

I could be wrong (shocked…I’m shocked!).  What happens if we do indeed steer this brobdingnagian (think Mr. Swift) economy between the rock and the hard place (and miss the bridge)?  What happens if the Fed really has found magic dust so that inflation continues to abate, yet the economy continues to grow?  What happens if all of this fiscal excess actually does turn into the elixir for continued economic growth and productivity?  What happens if after embracing climate change and gobs of money is spent, jobs really are created, innovation soars, great businesses are founded, inflation abates and full employment follows?  What happens if this approaching train wreck of an election turns out to be a nothing burger and all the geopolitical noise out there stays just noise?  Could happen.  

If you’re of the view that we are about to enter a new halcyon-like period of strong growth and economic vitality, if we’re about to return to an interest rate curve anchored by a sub 3% Fed funds rate an uninverted long bond still hanging around the 4% range, what do we do?  

If you think that the end of the commercial real estate market’s interregnum birthed by Covid and fueled by fiscal and monetary misstep is near its end, it might be time to open the play book on a return to normalcy.  What might that entail?  

·  Raise capital.  I know everyone has been doing it for distressed debt, but maybe it’s time to refresh capital for regular-way lending.  Counterprogramming to the doomsters!  

·  Refresh or get a new warehouse.  Every non-bank lender needs at least two warehouses because it’s difficult to predict how any bank’s credit committee will react to particular loans.  You need options.  I know warehouses are ridiculously expensive to close and painful if there’s not product readily available to begin to amortize the cost, but it also takes months to get one of these closed.  Better start now.  And right now, many a bank is panting for warehouse exposure (low RBC, low attachment point, plenty of fees, not bad spreads, repo remedies, guaranties and cross-collateralization…what’s not to like).  

·  Aggressively reengage with the client base.  Hire some of the origination team back.  Get out there and build the bridges necessary to get a shot at production.  As we know, if you’re not one of the top 5 options for a borrower (or, God help us, its mortgage banker), you’re probably aren’t going to see much good stuff.  How about doing a client event (in this more prudent and unextravagant time, something short of the Nomura parties of old, perhaps)?  How about sending senior people out on a charm tour to meet with significant borrowers, even if there’s nothing currently on the table?  Might be money well spent.  

·  Work on building a reputation on not being a pirate.  When times are tough and distressed debt abounds, everyone goes to their corner.  While it makes compelling sense for lenders who need to protect shareholders or investors to get aggressive in enforcing loan documents and exercising remedies, the borrowers may have more of a more “barbarians at the gate” view of such behavior.  You can’t change the facts, a lender has to do what it must do, but you can change the narrative.  A bit more honey and a little less vinegar?  A smile while foreclosing?  Build (or rebuild) the case that your institution is a good counterparty.  

·  Build out the chassis of a CRE CLO to shorten the launch interval between accumulating collateral and issuing securities.  The traditional CRE CLO timeline is multiple months, usually considerably longer than closing on a warehouse.  A lot of work can be done long before the tape is finished and the pool is set to build out key documents, establish relationships with likely counterparties, etc.  Good investment.  

·  In times of diminished flow (and that will be true for a while even as the market reflates), consider (or reconsider) the possibility of a multi-seller CRE CLO.  Totally doable, just needs a bit of engineering.  

·  And for something a little off-piece but something worth thinking about, engineer a structure wherein the lender can benefit from the return to a lower index.  Why not share this public policy generated gift to the market?  How about a pricing matrix that would allow the lender to harvest more spread as the underlying index drops?  Could be paid for with a discount to the market’s current spread?  There are undoubtedly derivative trades that might accomplish the same thing on individual assets or portfolio basis.  Nothing’s free, but 200-300 bps of index retrenchment is certainly a juicy thing to monetize.  Worth a thought.  

·  Get comfortable with relatively short rate caps (or use a corresponding reserve).  If the index comes in, rate caps will rapidly become less expensive and will be generally available.  If the bet’s right, all will be good.   

·  Negotiate for a lengthier yield maintenance position than normal because it might be a while before you can successfully securitize the new cadre of assets. 

·  Get more comfortable in extending existing loans in expectation of a more rapid retrenchment of the index.  A kick the can down the road strategy has often been associated with a certain lack of courage, but actually could be brilliant strategy if the macro is right.  In connection with loan modifications, think about a ROFR on refinancing. 

You pay your money; you take your chances.  If the optimists are right and the level of normalcy which will allow refinancing of the huge wall of maturities confronting us is around the corner, then the first movers will have a huge advantage.  A couple of weeks ago, I published a commentary raising the question whether commercial real estate could be the match that lights the next major financial conflagration, I hedged my bets by saying I didn’t really believe that story.  Well, let me hedge my bets again, I’m not sure I really believe this story either.