Inside Structured Leverage: Episode 2 – The First Date. Choosing the Right Structured Leverage Partner

Ruth Harris:
Hello everyone and welcome to episode two of our podcast series on Structured Leverage, the artist formerly known as Back Leverage. I'm Ruth Harris and once again, I'm joined by AJ Storton, who's formerly at JP Morgan and is now a partner at Art Capital. So, Art Capital is the debt advisor that won the Real Estate Capital UK Debt Advisor of the Year Award just recently. In this episode, I'm delighted to say that we're joined by some special guests to give us the inside story on how they go about choosing the right structured leverage lenders to partner with. I'll let AJ introduce them in a minute, but first a recap on episode one.

In episode one, AJ and I explored how the real estate back leverage market was reported by CREFC Europe to have risen from 17 billion in 2024 to around 24 billion in 2025. It's well reported that lots of debt funds have indicated that they're already using back leverage, or if they haven't yet, they're looking to do so. But what perhaps is unclear is exactly what is understood to be included in the term back leverage.

We discussed that back leverage is often interpreted in the narrow sense of lending to lenders and includes repos on GMRA or MRA format where there is a sale and repurchase of loans or credit derived from loans and some would also include NAV financings, but it's possible that the stats we hear on back leverage don't give the full story of how credit is being designed and traded to achieve set objectives associated with back leverage.

So, in episode one, we discussed what those objectives might be, such as enhanced IRR for borrowers, better red cap treatment for lenders through the priority trenching, perhaps diversifying risk or offlaying risk and maximizing origination capacity, other balance sheet management objectives, just as some examples. If wider categories of credit design and trading that achieve these set objectives are included in back leverage, or should I say structured leverage, then we are certain that the growth to date and the growth trajectory would be even greater.

So, just as an example, we mentioned in episode one that we've been seeing an increase in the use of SRTs given the changes in the European free market in the sense of the sponsor base and geographical spread is becoming more diverse. On top of real estate becoming more operational, the SRT market for CRE has opened up alongside other credit designs such as unfunded credit protection, forward flow, structured deposits, credit default swaps, and lots of other rinky-dink formats. So, I suppose that structured leverage is likely to be bigger and broader than the surveys would suggest.

In episode one, we also introduced the idea that structured leverage is ultimately about finding alignment between different providers of capital. We finished by saying that we should discuss this in future episodes in that what should we look for in a structured leverage partner? And that's exactly what we're going to focus on today. I suppose you could frame it as the first date, but joking aside, finding the right structured leverage partner is actually one of the most important decisions in the whole process.

AJ Storton:
Last time we suggested back leverage is only one subset of a much broader structured leverage market, as you said. Today, what we're going to do is move from product itself and speak to a few of the people behind it. We're going to discuss how to choose the right structured leverage partner.

Ruth Harris:
So, shall we introduce our special guests today?

AJ Storton:
We have from Nuveen, Farrah Brown, who is head of debt capital markets for Europe and Shawn Kaufman, also from Nuveen, who is head of debt capital markets for the Americas. Farrah, Shawn, welcome. Would you mind each giving a quick one-minute summary of your roles in the business, your experience, and what your use of structured leverage has been to date?

Shawn Kaufman:
Hi, everyone. Shawn Kaufman, lead capital markets for Nuveen Real Estate here in the United States. I've actually been in the industry for over 25 years and have spent a good portion of my time in both the European and the US markets. Nuveen Real Estate is $140 billion of real estate assets globally, of which 45 billion are real estate credit products. And we have utilized back leverage structures, predominantly repo warehouse, standalone loan-on-loan structures for the better part of the last six to seven years and have various line providers across our fund levered fund strategies.

Farrah Brown:
Hi, everyone. Delighted to be here today. So, my role at Nuveen is raising and managing debt for our real estate funds, be that on our equity side and our on the debt side. This conversation's actually quite timely because in Europe, we have not actually used structured leverage or back leverage. So, look forward to the conversation today.

AJ Storton:
Excellent. And from what I understand, Farrah, you are about to select the back leverage partner in Europe. Is that right?

Farrah Brown:
That's right. We are currently in the market speaking to various back leverage providers to source financing for this newly launched credit fund, which will have a European focus.

AJ Storton:
Excellent. So, this is very relevant then, so it's great to have you on. And just before we get cracking further, I just wanted to thank all our listeners for firstly subscribing and for being back a second time. If you're back for a first time, then please go back and listen to our first episode. So, Shawn, you are based in the US, based in New York. The repo business in the US is enormous and ultimately that's where the back leverage, structured leverage market in Europe has grown from. Can you give us a quick overview of where you see the US market so that we can understand the direction of travel in the US and see where European market may or may not be moving to in the near future?

Shawn Kaufman:
Yeah, of course, AJ. I think that's one of the key things that we see. The market did evolve and was created in the US, but it's also certain features of that the US market have poured over to the European market, which is a little bit more nascent and new to the business, but repo warehouse has been widely available in the US markets for many years. Although I would say it's actually a really exciting time in both Europe, Asia, and the US for back leverage, which is predominantly driven by the regulatory capital treatment that lenders receive from utilizing this type of financing.

And what we've really seen over the last three to five years in the US is a complete shift in terms of the number of entrants that are providing back leverage. It used to just be predominantly a space that was dominated by money center and investment banks, but it's now bridged across to regional banks to foreign banks and even in certain cases, life insurance companies that are providing back leverage to sponsors. So, it's a very exciting time and I'm looking forward to us going into some of the reasons and what we look for when finding back leverage providers courted pretty heavily in the market lately with the fund that you're raising and looking to get financing lines for.

Farrah Brown:
Yes, it's quite a nice position to be in. As I've heard AJA reference a number of times in the past, this type of lending is a relationship play and for the moment whilst we speak to various back leverage providers, it's about selecting the right one and getting comfortable with their investment parameters, their investment appetite, the sectors, the jurisdictions, et cetera.

Whilst we discuss how various lenders structure this, each lender does it slightly differently and at the point at which I'm yet to mandate a lender, it's quite a nice position to be in because I would say that we could be love bombing and being love bombed at the moment that these providers essentially will promise you, "Oh yes, we can do it this way. We'll be very relaxed. We will work with you if an underlying loan goes into default." But it's actually what is their track record? Well, how have they behaved previously and trying to get comfortable with that aspect of this type of finance?

AJ Storton:
So, I guess then digging in a little bit there, you talked about it's not just about pricing, it's not just about structure, but there's more about the relationship. Where's the obvious starting point? Is it existing relationships you might have in the US and bringing them over to Europe, or is it saying we're open to consider everything and people who are perhaps more experienced in Europe than they are in the US or is there more nuanced features to it?

Farrah Brown:
So, I think an obvious starting position is to speak to those lenders who we already have a relationship and a good strong track record in other regions and certainly Shawn and I have worked closely on that and with those type of lenders. Really, the market in Europe is somewhat different and at the same time, this is a credit fund that we're sourcing debt for that will have its own investment parameters and we'll focus on European only transactions. So, we also have to bear that in mind and ensure that whichever structure we select from whichever provider is fit for purpose and sort of fits our groove, shall we say.

AJ Storton:
Farrah or Shawn, through your process in Europe, have you seen that the terms coming in or the structures are slightly different in Europe to what you would typically expect in the US or do you find they're very much aligned?

Farrah Brown:
I would say they're somewhat different and whenever we're speaking to those different types of lenders who are active in those different jurisdictions, we have to be mindful of what's appropriate for the jurisdiction in which we are active always with one eye on legal costs because as a European lender and stroke borrower under this back leverage structured leverage facility, why would I incur the additional legal costs of a US council if we were to transpose that US repo structure? 

Shawn Kaufman:
I think you see a bit of both, right? And what's really interesting when you have a platform like Convenes where we're active in multiple jurisdictions, APAC, Europe, the US, and there is a commonality of certain lenders that operate in all of those jurisdictions as in the positions that Fair and I are in, you actually get to see the structures in each individual market and certainly as a borrower, which is really kind of what I define as back leverage, anytime that you're sitting as a borrower in a structured credit vehicle, we let cherry-pick and have our cake and eat it too. We want to get the best structures from each market and apply that into the local jurisdiction that we're operating.

AJ Storton:
Ruth, is there anything here you want to pick up on what Farrah was saying about MRA versus USMRA versus perhaps LMA style loan-on-loan in Europe?

Ruth Harris:
Transposing the US repo into a European market is not going to necessarily be fit for purpose, but using the more UK format for repo is likely more fitting. What we quite often see on the repo side is that it has been in the past better to use for development finance loans rather than investment finance loans where maybe the loan-on-loan product has been better. I would say that often we see this repack of the loans into notes and then it's the notes that are the subject of the repo.

And perhaps that is where you are seeing that sort of extra complication and maybe wanting to avoid that from a legal fees perspective or just a time perspective, the restructuring around that, but it doesn't need to be complicated and certainly one of the things we're seeing more is the platform or the whole warehousing rather than doing it on a deal by deal basis. So, certainly that's a theme that the market is picking up now that it can be programmatic rather than deal by deal. And so, if you think the legal costs are high, yes, they might be, but if that's then setting up for a program, there can be efficiencies down the line.

AJ Storton:
That's an interesting point there, Ruth, because on my side at the moment, what I'm seeing is on the advisory side, probably working about 50/50 between warehouse facilities and single loan and loan. And going back to our former point, it's very much about the debt fund lender's strategy. If they're looking maybe to do more of like Farrah as a fund and have a theme to their lending and build an efficient portfolio, then yes, absolutely a warehouse line makes sense. If it's perhaps more opportunistic or the loan might be outsized for their traditional lending or they're doing a JV or even a single SMA, then they might be looking for single back leverage on something that's perhaps a larger ticket loan.

Ruth Harris:
I would agree with all of that actually, that makes perfect sense. It's again, just aligning the business model, isn't it, of both counterparties? So, it's straight on your point.

Farrah Brown:
That is actually one of our factors of consideration is a lender willing to provide back leverage on a loan where the fund itself is a co-lender along with a partner on that financing.

Shawn Kaufman:
It's interesting. If I look at from the perspective of the percentage of leverage that we employed over the last five or six years, five years ago in our US vehicles, I'd say 85% of what we did was one-off structural leverage. So, either syndicating a mortgage or doing a one-off standalone loan-on-loan position to today where I'd say it's more like 95% of what we use as leverage is a repo warehouse structure. And the old format was almost like being a one-off shoe cobbler. It was very bespoke. Every deal had to have some type of intercreditor individually, each financing was less expensive than the cost of setting up a warehouse line.

But if you accumulate that over 15, 20, 30 positions, the totality of that cost is actually significantly higher doing it on a one-off basis as opposed to the programmatic structure that you see with repo warehouse. And so, yeah, there's an upfront cost that's high to set up the lines, but then the actual addition of collateral is actually really efficient and very simple from a process perspective because you're typically ... I was laughing about the love bombing, but when we raised our US credit fund here a couple years ago, we had essentially a speed dating exercise where we had six, seven, eight different line providers come to our office and essentially showcase what their product was.

And in the end, we have three different line providers for our US vehicle and each one's a little bit different. But I think the common theme that stands behind all of them is that they are key strategic relationship lenders for Nuveen. And I go back to the point that AJ, you and Ruth both mentioned around alignment. You have to have alignment with the product and the strategy that you're investing into, but you also have to have alignment with the leverage providers because it's all great when times are good, but the true test of whether or not it was a good line provider selection or not is when times get difficult because really the structure of back leverage generally is favorable to the lender.

And Ruth, you won't want to hear this, but I've often said it almost doesn't even matter what we do from a legal perspective because somewhere within that document, there's a catchall that we will have to behave when the market gets difficult, but that's really why that alignment working with lenders who are strategic to your platform become invaluable in the future.

Ruth Harris:
I totally agree with that. And actually, I'm not that offended by you saying that it's not based on the legal documents. Because one thing I've been quite interested in is on programmatic lending, sometimes we see that bit on an uncommitted basis, but it's because of the relationship, not the documents, is actually treated as pretty much committed. And you have eligibility criteria, but you'll have a discussion around that at the time. So, even where you have programmatic and you think, "Well, it's not necessarily committed for all the loans that I need to be making," if you've got the right relationship and the right alignment, then you're right.

It's not so important what the documents say because you're going to get around a table and you're going to decide at that point in time, are we aligned on this one or not? So, I think it's a really interesting point you raise and maybe we do concentrate a bit too much on the legal documents, but I tell you something when it does go wrong, that is when everybody will be looking, or not, I shouldn't say when. If it ever did go wrong, then that's when everyone will be looking to what the workout mechanisms is.

Shawn Kaufman:
I would add the point there too. I go back to how so much of our business was one-off structural leverage, which I think intellectually is the better product for a credit vehicle on paper. But the reality is that the way that the warehouse lines are structured because you have the cross-collateralization, which is what gives the banks the regulatory capital benefit and the efficient pricing, it also buys you flexibility of the future. When it's just a single standalone financing, there's really not much choice that that leverage provider has if there's a problem. Whereas if you're able to offset a challenged position with other assets that are stronger, it generally works in the favor of the credit vehicle.

Ruth Harris:
Super interesting. I'd be really interested... I mean, what's the margin difference when you benefit from that cost collateralization just generally? I mean, you must get better margin treatment presumably.

Shawn Kaufman:
Without getting into specifics, I would say it's anywhere from 50 to 75 basis points.

Ruth Harris:
Yeah, that's really interesting.

Shawn Kaufman:
But that also drives the origination market as well. So, the end whole loan spreads are a direct derivative of the leverage spreads.

Ruth Harris:
Yes, that makes sense.

Shawn Kaufman:
So, in a lot of cases, the one-off structural leverage, and this is why in part because the regulatory capital treatment is better for the banks, that the pricing just doesn't work. I mean, if you're originating a loan at 225 plus SOFR, you can't finance it at 175 plus SOFR. The math doesn't work.

Farrah Brown:
One aspect that a number of lenders not all focus on is on having a diversified pool. And so, you'll have a period of time to ramp up the portfolio and within X number of months you need to have a minimum number of loans. And for us, that's something that we're quite mindful on because it is a very competitive market out there. So, we need to get the timing right of putting these facilities in place as well as marrying that with the underlying loans and getting those loans documented as well.

AJ Storton:
And Farrah, you mentioned about the ramp up there and having confidence in origination. If we think about the end of the facility, how do you manage the ramp down? Because obviously eventually when your loans are paying off on that specific line, you are going to fall beneath that minimum.

Farrah Brown:
Exactly. I think some of the lenders have said to us, oh, as long as you have the diversification on the way in, we're not so concerned about that on the way out. So, I think that's how we can get comfortable with it.

Shawn Kaufman:
There is acceleration or wind down provisions as you get towards the end of the facility life. Although Farrah, I think going back to the different suitors, one of yours we were discussing the other day that they've been really positive about new origination and new business, but then some of the market feedback is that if something goes wrong, you really just have to buy back the position, which-

Farrah Brown:
Exactly.

Shawn Kaufman:
Yeah. So, that's not an ideal situation to be in, especially for a closed end vehicle, but it also sounds at the beginning.

Ruth Harris:
Just out of interest on that, if you have a number of lines running and therefore on one line, you have to yank that loan, for example, do you ever do it? So, you might yank out of one line and you put it immediately into another, so draw on one to take out of another. Does that work?

Shawn Kaufman:
It can. I mean, generally speaking, there are exit fees associated with doing that and that's really to mitigate if you put in place two or three lines and one line provider, perhaps their pricing doesn't adjust with the market and another provider's does, it prevents you from taking those assets from the one line provider and dropping them into another. But typically if we're talking about maybe a challenged position, most lenders or repo providers would be happy to have you solve the problem and take it from them and give it to somebody else.

The reality is though that people generally don't have, they deal with their own problems, they want to deal with somebody else's problem. So, it's easier said than done.

Ruth Harris:
Interesting. Yeah, you wouldn't expect an exit fee in the challenged position, but sometimes they are in the documents you need to then just get around the table like we talked about and negotiate that out and solve the position outside of the documents, which is exactly what you were talking about.

Farrah Brown:
As a credit fund, we also want the flexibility to be able to work with our underlying borrowers with minimal interference from any back leverage provider.

AJ Storton:
The lender consent matters. I think we may have touched on in the previous episode. From my experience, back leverage lenders, structured leverage providers, their lender consent matters can vary considerably from some who like to control every small part of the loan as if they were a senior lender in the facility agreement to those who are happy to be very much in the background and trust that you as the originator and the lender with the relationship with the sponsor can manage the loan appropriately in your day-to-day.

I think where the commonality is when things do start getting difficult and start going in the wrong direction, that's where your back leverage provider does want to step in and have some control. Is that-

Farrah Brown:
Yeah, it's also going to depend on what the advance rates where I think it's all relative to the look through position and to the risk profile of that financing.

Shawn Kaufman:
We tend to self-select away from the back leverage providers that try to control things from the background.

Ruth Harris:
Does that mean therefore that you shy away from the higher advance rates? Because if I understand what you were just saying, so when it's a higher advanced rate, you were more likely to be put to under pressure to accept more back level intervention, but you're like set the lower advance rate for just having that control over your borrowing positions.

Farrah Brown:
Exactly, exactly.

Shawn Kaufman:
But ultimately though, that comes down to the underlying investment strategy because we're manufacturing levered returns so you can take risk in different formats. So, you can utilise a higher advance rate if the underlying asset is more stabilised or has less transition. The greater the amount of transition you want to be very careful of how much leverage you're putting on top of leverage.

Ruth Harris:
Makes sense.

Shawn Kaufman:
One of the things that I think is really interesting about the evolution of the industry in the US, and I think also that carries over to Europe. 10 years ago, the back leverage providers for the most part were using warehouse lines to bridge to some capital markets exit predominantly a CLO or asset-backed securitization.

That still exists and that's a very big feature of the US market because the advance rates and the pricing you can get in the public markets is significantly better than what you get even from the warehouse line providers, but it's really this concept that the banks are accessing the real estate market in an indirect basis and simply using warehouse lines and back leverage as a better, more efficient alternative to direct lending. And the capital treatment is significantly better than lending direct to a sponsor.

So, it actually is a great evolution of the structured finance market where you have specialists like Nuveen Real Estate that have not only credit platforms, but equity platforms that understand the real estate and can work with the underlying sponsors and then you have the banks sitting in the background. It's a very big shift from where we were in 2006, seven and eight when we had the significant problems of a financial crisis and it structurally makes the market more resilient and more sound.

Ruth Harris:
Yeah, I agree with that. And the interesting thing about it being that commercial banks that are now providers of the back level because of that red cap treatment means that standing behind you rather than having someone that doesn't understand real estate, you have the desks that were running the show not many years back and deeply understand the real estate credit. And therefore when things need a little bit of help and assistance, you actually have people that can work through that with you.

So, it's almost like having an extra desk that can assist and strategize with you and advise with you should things take a turn, rather than having somebody like some of the mesolenders of the past that perhaps didn't have that same quality of experience and expertise.

AJ Storton:
They're less of a warehouse facility, more of an origination facility these days. I think what's interesting is you touched on the capital markets exit, which was the original genesis of these warehouse facilities in the US and the fact that in Europe post GFC, we've had one CRE, CLO and CMBS is just not anywhere close to the volume it is in the US. So, it's interesting that it has evolved in Europe the back leverage business has evolved from US repo, but I think it's never really to date been about warehousing for a capital markets exit.

If we do see the CRE, CLO markets start to open, then I can see it being more of a warehouse facility. But I do think, and I've said this before at conferences, I think there are a large number of barriers to the CRE, CLO market really opening up and developing. I won't bore you all on this podcast now, but I think one of the biggest is origination, speed and volume. To create a CRE, CLO, you need a reasonably sized pool, let's say, five to 10 loans of transitional loans, not development, not stabilised, and you need them all to be at a reasonable period in their business plan so that their term, their maturity is around a similar time. I think that's the very first step that we need.

And for someone to be confidently originating that volume of those types of loans, there's only limited players in Europe who are able to do that at the moment.

Shawn Kaufman:
That's right. But I think that also then speaks to the way that the markets evolved in Europe and to a certain extent in the US where the banks that are providing this, it's a long-term business for them. And it goes back to that relationship durability concept where yes, I mean certain repo facilities, if there's a hailstorm that could be a credit event and you have to buy back the position, but the reality is there's a checks and balance with the provider because they see it as a long-term financing product for their customers. So, the documentation certainly tends to be in the favour of the line provider, but there's this balance that exists because it's a long game.

Farrah Brown:
That proof's quite challenging from an underwriting perspective, I have to say, doesn't it?

Shawn Kaufman:
It does. It does, but that does we have track record with certain of our providers and I do think that we are thoughtful and strategic about who we select or said differently, we wouldn't just pick a line provider Sure. Where there's no other relationship with across the Nuveen real estate or the Nuveen platform. We need to be able to have access to other parts of that lending relationship for the reasons that we've discussed around when the market becomes more challenging.

Ruth Harris:
Let's talk a little bit about if the market did become more challenging. I know there's a lot of chat when I talk to potential takers of back leverage around the mark-to-market and the valuation methodology at that time. Should we talk a bit about that, about what are you seeing from your potential lenders in relation to mark-to-market and valuation?

Farrah Brown:
Well, certainly not all lenders require mark to market and instead we are looking at considering having looked through covenants instead, but at the same time, you don't want those biting at the same time as your underlying whole loan. So, that is something actually that we're analysing at the moment. Part of me feels quite conflicted on this point because the look through covenants can be quite binary, whereas market market can be a little bit more subjective. And couple that with the recourse, the level of recourse that is required generally by the provider. I'm in two minds.

This is why we're as yet still demanding it because we're weighing up various options, particularly because the loans that we are originating are our construction loans, our development financing. So, there is a stress test as well and how far can the market move? And if there is no diversification of loans, then you need to be that bit more thorough in your stress testing of those underlying covenants.

AJ Storton:
It sounds to me, Farrah, there isn't a lot of commonality between the terms you're receiving, but be that diversification, be that market to market, be that margin calls, be that due diligence, valuations, partial recourse. It sounds like you're getting lots of different terms and you're having to piece together this jigsaw puzzle where the pieces may not all be the same shape.

Farrah Brown:
Yeah, I see it more as a 3D Rubik's Cube that we're trying to put together. And yeah, everybody does it slightly different and everybody's got some advantages and disadvantages. And couple that with a market that is really difficult to originate loans and get signed term sheets and competitions really tight to win those transactions. Yeah, it's interesting times, but it's not exactly fun, but it's certainly interesting. And yeah, I have somewhat delayed this process at the moment because it is something that we're looking at from all different angles at the moment and using our global relationships.
But again, like Shawn said, we're also speaking to a few lenders that where we don't have those direct relationships just to look at how they structure also, but, yeah, it keeps you thinking.

Shawn Kaufman:
And I mentioned we have three different line providers. They're all domestic banks in the US, but we were very proud of ourselves because every single one of those lines was a non-recourse line and all but one of them had no credit mark feature, which sounded great. Until as we continued to originate and the market became more aggressive, certain of the collateral that we wanted to finance, we could only put it with the line provider that had the credit mark. So, we then went back to the other two providers and said, "Hey, we'd like to give you a credit mark so that you can say yes to more of our positions."

It doesn't mean that you have to use it or that each position has to be subject to the credit mark, but because in our positions, we want to be able to create competitive tension amongst the different line providers to drive the execution and the structure and the pricing. So, that's an interesting evolution where you think that having less control from the provider is beneficial, but then if that becomes restrictive, you need to be open-minded to adding structure to facilitate your own origination.

Ruth Harris:
Super interesting. So, you offered credit mark rather than the recourse, that was your choice there?

Shawn Kaufman:
Correct, correct. And I can say that we've actually never been subject to a credit mark even though-

Ruth Harris:
That's very interesting.

Shawn Kaufman:
Now that's not to say we haven't had to remargin. It's simply we never got that piece of paper that says remargin us by X. But there is this general understanding because of the cross-colonialized nature of the facilities that you do need to perform in a certain way when there are challenging assets. And yeah, Ruth, the recourse versus non-recourse, it was this situation where we kept asking providers, "Do we get better pricing if there's recourse?" And the answer is no.

And it's a legacy structure that's existed in the market that the banks that were providing it always got recourse, but the reality is the cross-collateralization is what really drives the rig cap treatment and really what drives the borrower behaviour and the recourse is not necessarily necessary. Now, maybe if you're financing construction loans, that's a different situation, but not having to provide the recourse is certainly a valuable feature for us when we're out capital raising with our investors. And that's ultimately what the banks want you to do too, is raise more capital so that they can continue to finance you.

AJ Storton:
I would agree with that, Shawn, on your recourse point. It's felt to me like a lot of the back leverage providers either need it or don't need it more because of their internal policies and because of historic market and expectations rather than looking with a fresh eye and saying, "This is the pool of loans, this is the type of lending, therefore I can adjust my strategy or my policy." Some can adjust it, but most don't seem to be able to.

Shawn Kaufman:
Well, and that goes back to the basics of supply and demand in Econ 101, where when there were only five, six, seven providers 10 years ago, that was the product and that's the really interesting part. The more supply we have from foreign lenders, from regional banks, it's driving change in the underlying product that's this evolving in both the US, the European, and the APAC markets.

Ruth Harris:
And I'd say there's another layer to that as well. So, the more supply there is, the more therefore you can rely, I think, on relationships. Tell me if you agree, because those relationships aren't cast in stone, you've got more supply to move your business elsewhere. So, we started with the call on how important the relationship is. I think that at the additional entrance into the market, the extra liquidity in the market really does drill that relationship point home because no one wants to lose the line they have with Nuveen and the other borrowers of back leverage. So, I think supply really helps relationship. They support each other.

Farrah Brown:
I would say that every lender thinks they've got the best relationship with you as a borrower.

AJ Storton:
That is true.

Farrah Brown:
So, we have to manage those expectations somewhat.

AJ Storton:
Farrah, I'd be interested to understand how much emphasis in your process you've put on the slightly softer side of the back leverage process. So, things like operational alignment or alignment of their process to your process, things like timings of approval, how they value the underlying assets, what level of DD, et cetera, they need to do.

Farrah Brown:
Certainly on of the aspects that Nuveen credit team has prided itself since they started lending in Europe, I know 10 plus years ago is on the reputation, is on the ability to deliver to our underlying borrowers. So, it's incredibly important for us to have those back leverage providers be able to deliver an equal measure to us because ultimately if they don't deliver, that is going to severely impact our underlying borrowers, particularly if it's acquisition financing where everybody's working to tight deadlines. So, that is a focus for us. And again, every lender will tell us how quick they are, how much delegated authority they have to give consent, et cetera, et cetera.

And the devil is in the detail when it comes to documenting that. But our reputation in the market and our ability to deliver on complex transactions in a very quick timeframe is something that we're very protective of and something that we absolutely need our back leverage provider to deliver on also.

Shawn Kaufman:
Consistency and reliability, like in any relationship, that's what really matters.

Ruth Harris:
And Shawn, is most of what you do table funding, so it needs to be there at the same time that you close the transaction, or do you have a period where actually the back lever can come in just behind?

Shawn Kaufman:
Yeah, it's a good question, Ruth. I mean, utilise both. I'd say the vast majority of the positions we originate from a subscription line of credit and then subsequently put the back leverage in place. Although that said, the market operates in, it ebbs and flows and when the market's really hot, you tend to have a lot of positions all at once that need to be financed. So, that ability to table fund is critical as well. And we do from time to time look to our line providers to table fund or wet fund. And that's something to do that you have to have a really strong operating cadence with. It's not just speaking to the person that says, yes, we can do this at 75% advance rate and X spread.

It's the middle office, the closing teams, that all has to work really cohesively in order for that table funding to happen, especially if it's an acquisition where you're putting the borrower's deposit and their reputation on the line because of the financing that you're using.

Ruth Harris:
So, you're bringing them alongside in the due diligence and the documentation at the earliest stages in the transaction and bringing them up to date as you go along?

Shawn Kaufman:
Yeah. But again, I think about that from when we solely employed structural leverage, it could be done where you co-originate with another lender or do a participation in the background, but it's significantly more complex to do that on a one-off basis versus having the programmatic warehouse lines in place.

Ruth Harris:
Yeah. So, part of your question, AJ, I suppose before was that softer touch. So, there's the upfront information that's needed, but then as the transaction is live and if it is closed and it's all running, the information flow that is required by the back level provider through the consent mechanism, but just as a sort of general, I don't know, quarterly information flow, whatever it might be, presumably that's a really important part of choosing who you transact with because it's putting an extra burden on you if they have burdensome requirements.

Farrah Brown:
Exactly. We're not going to have a back leverage position which is more onerous than the underlying borrower's obligation to provide information that just wouldn't make sense for us. So, just a pathway. And I'd like to pass through and I'd like to think that we've got the expertise to underwrite and document financings that should be able to deliver on that.

AJ Storton:
Shawn, have you seen situations where the back leverage provider has asked you to change anything in the underlying documentation of the whole loan?

Shawn Kaufman:
Yeah. And I think there is, having been one of the people that was on the team 10 years ago when we started the business in Europe, I do think the US market tends to be more of a flow business and there are just generally accepted structures that exist within our market that the European market certainly is more bespoke, I think, and that I could see that coming up in European markets, but less so in Europe or in the US rather.

And I guess the other thing with that operating cadence with the provider, I think one of the things that sticks in my head is that the relationship gets underwritten during the good times, but it's tested during the difficult times and that's where it really becomes important that you have that operating cadence with your providers, the back leverage providers to help you work through situations that will invariably arise. We've all been in this market long enough to know that it is a cyclical market and there are going to be points in time when you need to work with not only your underlying sponsors, but with your vac leverage providers.

AJ Storton:
Absolutely. And to your point in Europe being more bespoke in my previous life, I had some of my back leverage borrowers coming to me during their origination of the loans and saying, "Hey, our borrowers asking for this, this is slightly more unusual. What do you think? Would this be acceptable to you? We think we can get comfortable with it for these reasons, but if you're not comfortable with it, then we will push back." And that's where you need a back leverage provider who's able to give their opinion to you and stick to it.

It's all very well them saying, yes, on the phone, you go away, you close the loan, and then they take it to committee and say, "Oh, we don't like this point." That's unacceptable in my view.

Farrah Brown:
It'd be a disaster really because you need a partner that you can rely on. I've got the CM issue sometimes at the moment on the direct side, your originator will say they can deliver on a term sheet and once it gets to credit, it's rejected for various reasons. That's just not acceptable. I don't expect it on the direct side and I certainly wouldn't expect it on the indirect side.

Ruth Harris:
So, maybe another question, perhaps a bit of a technical question, and I don't know if anyone can answer this, but do you think that real estate debt and the provision of structured leverage supporting real estate debt is set to benefit from the changes to the solvency two regulations that will come into force next year? I'm just thinking that this may encourage certain European insurers to hold securitized exposures because of the potential reduction in the capital charges required. Do you expect this is going to improve European insurer's ability to participate perhaps in back leverage?

Shawn Kaufman:
We've talked about it a bit here and I think the answer, although it's probably evolving, is that we have a general reluctance to use our parent company to potentially finance competing platforms, but the parent company at the end of the day will act in its own best interest. And if the capital treatment is really efficient for them, that may be something that they would just do because it makes sense from an asset liability perspective. I mean, just back leverage and warehouse, it's almost like it's trending like a TikTok video amongst banks.

It feels like because the capital treatment is so efficient, anyone that doesn't have it has heard about it and they want to get in on the action. So, I just think we're going to continue to see whether it's from smaller regional banks or it's from foreign banks or it's from insurance companies, there's just going to continue to be more and more entrance into the space, which ultimately that's going to be really good for Farrah and I and our credit vehicles.

AJ Storton:
Absolutely. I would agree with that, Shawn. I have multiple conversations with potential new entrants who want to be educated on where the market is, where the structures that are, where the best entrance point for them is. But equally conversely to that, I have the same conversations with debt funds who hear that everyone else, all their competitors are using back leverage and how can they get involved with the structured leverage journey

Shawn Kaufman:
That said though, it's not necessarily easy for the new entrants because it goes back to having that proven track record of behaviour when the markets become more challenging. And I guess pricing can only go so far. And so, for the most part, the pricing trades within five, 10, 15 basis points from one provider to the other. But what you don't know is how somebody new will behave, what their credit department will do when you have challenges. And I don't think any of us ... I would take the certainty of the predictability of the behaviour over five, 10 or 15 basis points of credit spread.

Ruth Harris:
So, we're nearly coming to time now and I know on the last episode we did some quick fire questions at the end. So, what their takeaway top tip is when embarking on structured leverage. So, can we start with you, Shawn?

Shawn Kaufman:
Sure. For me, it's simple. Relationship, relationship, relationship.

Ruth Harris:
Right. On point. Farrah?

Farrah Brown:
For me, what's been incredibly helpful is speaking to other credit funds, other back leverage borrowers just to understand behaviour, obviously always on a no names basis, but just to understand operationally, how easy is it? Logistically, how easy has it been? Who's good at various teams at different lenders? And just to give that insight into the softer aspect that AJ was referring to earlier.

Ruth Harris:
That's a good one, actually. Collaboration conversations. What about you, AJ?

AJ Storton:
For me, I think it would be running a competitive process. As Farrah said, there's so much disparity in terms, particularly in Europe, that if you are just speaking to one or two of the players in the market, you're not going to be getting the most competitive terms, or at least not knowing that you're getting the most competitive terms.

Ruth Harris:
That's a good one. And that feeds in quite well to the point that was made about all of the terms that come back are just so different. I mean, I don't know how you compare what's the best option apart from saying it's just down to relationship, as Shawn said, but certainly I would've thought advising a debt advisor at the start to help create that chart of where are the best terms coming from and maybe even ranking them, weighting them with where the emphasis should be. So, that would be a good one.

But I think I would add, just think long-term, which is linked to the relationship, but think about it not in just relation to getting the origination and the table funding and that speed there, but you're going to have to stand side by side all the way through. So, we're just about running out of time now. In this episode, we've covered quite a lot of ground. We've covered how to find the right partner, making sure motivations, objectives, and business plans are aligned. Suppose it's a bit like being on hinge to find the first date if you like, but the question that we narrow need to ask is how do you make it official?

So, in the next episode, we will focus on this, how to turn a good relationship into a properly structured transaction. How does the relationship translate into words on paper? We'll look at some of the different legal frameworks, documentation formats, and how key negotiated terms might differ depending on the format that you use. But if you have any questions that you'd like us to cover in that next episode, just email AJ or myself or contact either of us on LinkedIn. Shawn, Farrah, do you have any messages or questions for our next guests?
Shawn Kaufman:

I just really look forward to moving from the dating aspect to the committed relationship and formalising the arrangement.

Ruth Harris:
Super. Farrah?

Farrah Brown:
Given the importance of the relationship, how is that impacted as an if and when things don't actually go to plan?

Ruth Harris:
Okay. So, we're just about at time now, I'm afraid. So, let's thank our listeners for tuning in. Please tune into episode three after the summer. Meanwhile, there's some useful 101 videos on the CREFC Europe website, as well as some jargon busters and AJ, we know where to find you at Art Capital. Thanks again for listening in.