Thread by @TihoBrkan

1/ As you get better at your niche, you start to recognize the good from the ugly.

Example:

• nonperforming loan
• mezzanine debt opportunity
• London construction project
• interest rate 20% pa
• gross exit LTV @ 78%

What is the real risk here? (continued)

2/ At 78% LTV, you do have a meaningful buffer/cushion from the equity holder + their potential profit.

However, the story gets better.

First, traditionally London developers have had to build a certain part of the residential development in the so-called "affordable" space.

3/ As an example, with a 20 unit building in central London, you might also have 1 commercial space below and 4-6 affordable units which are traditionally purchased in bulk by registered housing associations.

These are usually the easiest to sell & go straight away.

4/ All of a sudden, with commercial & affordable housing sold, the project has been "de-risked" with these early sales.

Keep in mind, I mentioned this is a nonperforming loan. Since this project has been dormant for several months due to a contractor bankruptcy...

5/ ...there is also additional income in the form of an insurance bond payout.

Insurance will pay out non-performance compensation when contractors go bankrupt and don't deliver on their construction contract, giving another small source of income to a distressed investor.

6/ Hopefully I haven't lost you by now. Summary:

Taking over the nonperforming loan, an additional benefit from the early sale of commercial space on the ground floor + affordable units purchased by housing association + insurance bond pay out.

This "de-risks" the deal!

7/ All of a sudden gross exit (principal + interest) goes from 78% LTV to a true risk level of 61.4% LTV.

Nonperforming loans like this one might look ugly at first,

But as you get down & dirty into due diligence you realize you're making EQUITY returns with SENIOR DEBT risk.