Bridge, CLOs and Construction Risk: 6 Questions To Ask

Collateralized Loan Obligations (CLOs) and bridge lending hit record levels in 2021, driven by market uncertainty, a large inventory of transitional assets and an insatiable demand from the debt capital markets. Feedback from our clients confirms that they see no sign of the CLO market slowing in 2022.

These loans “bridge” the gap between acquisition and permanent financing and the CLO structure provides funding mechanisms for the sponsor to implement the necessary renovation or redevelopment required to stabilize the asset. Proper execution of the renovation/redevelopment plan by the sponsor is integral to the success of the loan and experienced CLO originators understand the need to manage the construction risk associated with these projects.

As a bridge or CLO lender, are you properly quantifying and underwriting the risks associated with the construction component of the loan? What risk management protocols do you have in place? Are they enough?

With so many fresh players entering the bridge lending and CLO space in the last two years we have seen some that aren’t doing enough to mitigate risk. In this Globe St. article, Charles Tallinger discusses what questions to ask yourself and your consultant to gain greater certainty of execution.