Finance - High Yield/Subordinated Debt
This high-yield area of the capital stack creates the most value for our clients, yet at the same time, it creates the most danger for a client if improperly structured and put together. This is an area where a lawyer -- and a client -- who really understands the subtleties can add a great deal of value.
Practice Group Leader: Tom O’Connor
Our high yield/subordinate debt practice group (a/k/a the Mezz Masters) focuses our extensive experience and expertise on all aspects of high-yield real estate debt structures, including: Mezzanine Lending, Preferred Equity, B-Notes and Co-Lender and Participation arrangements, and other more arcane structures, all having the common objective of achieving high-yield and managing the risk in the best way possible. This also includes buying, selling, recapitalizing and restructuring high yield debt, and when necessary litigating and participating in the so-called “tranche warfare” that often emerges in this space.
Our philosophy in developing our Mezz Masters practice is simple:
This high-yield area of the capital stack creates the most value for our clients, yet at the same time, it creates the most danger for a client if improperly structured and put together. Indeed, if you look at what happened during the Financial Crisis, the mezzanine and other subordinated positions were often severely impaired. Of course, part of the reason for this is that the mezzanine is in a subordinate position and while that was taken into account in underwriting; often things were made much worse by the fact that many mezzanine players didn’t understand the subtleties of their collateral, the workings of the intercreditor agreement and/or the critical interactions of the recourse carve-out guaranties and/or the way the courts would or could construe these documents.
We like this area because it is one where a lawyer – and a client -- who really understands the subtleties can add a great deal of value over a lawyer and client who does not. It is like playing chess in the future and it plays to our strengths of being able to see what will happen and make sure that no matter what transpires, our clients will be protected or, if they are taking risks, know such risks in advance.
Indeed, what can happen is that a lawyer with a moderate level of finance skill puts the documents together but does not have the expertise or skill to foresee the critical issues. Everything is fine until things are not fine. At that time everyone rushes to the documents to see where things stand. But at that point it is too late.
Ultimately, high yield debt is an area of law where we can really add “value” for our clients – an area that not all lawyers can handle expertly and where our skill set really stands out. For that reason we have created our Mezz Masters Practice Group.
We start with originating an uncountable number of first mortgages, which is a good predicate because our team knows perfectly well what the first lender needs and wants and how to negotiate with them.
We move into a wealth of expertise originating, selling and acquiring mezzanine loans (and other high-yield products or structures) for our clients, including “distressed” and non-performing debt.
We move further into numerous multi-tranched capital stack workouts, including so-called “tranche warfare”. Some of us have been through three market downturns – we have seen firsthand what can go wrong and know how to put documents in place to address these issues in the best way possible.
We continue with numerous deals in restructuring and recapitalizing performing and non-performing loans.
We bring it to the next level with one of the best joint venture practices in the real estate world. This is a tonic to have in preferred equity, participation agreements, B-notes, co-lender arrangements and similar matters that in many respects have joint venture type features. How many lenders have used a so-called “lender lawyer” to put together a co-lender agreement and regretted it when the borrower got into trouble. Understanding the subtleties of both joint venture and debt practice gives us a great advantage with this type of transaction.
And we conclude with specialty areas in which it is particularly critical to have experienced counsel, such as high-yield debt in a construction loan scenario, non-US transactions and cross-border transactions.
All of this gives us knowledge of what is and is not market, what everyone else is thinking or should be thinking, and how to take advantage of the angles.
Ultimately, as a firm we seek areas of the law where we can really add “value” for our clients – areas that not all lawyers can handle expertly and where our skill set really stands out. This is such an area and, accordingly, we highlight our expertise here.
Oh – and by the way – as you hopefully know, our core mission statement is to “help our clients build their businesses. We often do this by making useful connections for our clients and we find the high-yield debt area particularly conducive to these types of connections.