Private Lending Insights

[00:00:00] Rocky Butani: Welcome to Private Lending Insights. I'm your host, Rocky Butani. In this episode, I interviewed Aleksandra Simanovsky from Adige Asset Advisory. She is an expert in RTL securitizations and helps private lenders get their securitization deals done. We talked about the state of capital markets and securitizations in 2026, and also dig deep into how securitizations work, the economics, the bond investors involved, uh, what lenders need to do to prepare for securitizations, and so much more.

[00:00:32] This topic of securitizations is not gonna be super interesting to a lot of our audience. Real estate investors especially, uh, may not, uh, care to know all the details of how these deals work. Um, but any lenders out there, even ones that don't do any securitizations or have no interest in it, it, uh, some of this information is good to know just how it works, because some of the larger lenders out there that are doing securitizations are getting a very low cost of capital, and that may translate into them offering lower rates, which a lot of lenders out there that don't take any institutional capital have to compete with.

[00:01:13] So for that purpose, it may be good for some of the private lenders out there, uh, to just to know how the stuff works, and, um, there might be some interesting information you learn from it. With that, let's get started. Here's my interview with Aleksandra Simonovski. Aleksandra, thank you so much for joining me for this episode of Private Lending Insights.

[00:01:35] I am excited to speak with you and learn all about securitizations, and I'm sure our audience will appreciate this information as well. Uh,

[00:01:43] let's start off, uh, w- with you just telling us a little bit about yourself and your role in this world of, uh, residential transition loans and private lending.

[00:01:52] Aleksandra Simanovsky | Adige Advisory: Sure.

[00:01:52] Happy to. Great to be on, Rocky. Um, so I started my career in institutional structured finance. I've done a stint at RMBS, ABS, commercial real estate mortgage-backed securities, and in 2019, I fell into private lending at a time when this wasn't an institutional asset class. It was quite fragmented. And funny enough, I was hired at Toorak, and my nickname was Triple A.

[00:02:19] So my goal was to get the space rated to make sure the institutional market understands the residential transitional loans, and it was a long effort. It took from 2019 to '24 to get the first deal rated, and I'm incredibly fortunate to have had that, um, experience of leading that first ever rated securitization effort.

[00:02:42] Rocky Butani: And, uh, and so now you have your own consulting firm where you help lenders, uh, go to direct securitizations. Is that right?

[00:02:50] Aleksandra Simanovsky | Adige Advisory: That's exactly right. So in '24, it was an incredible change in the market. The issuance went from about $2 billion a year to over $6 billion in a matter of a year because of this institutional insurance company.

[00:03:06] All these pockets of money that weren't able to invest into RTL could finally buy investment-grade bonds. And, um, a lot of new issuers came to the space, and from my conversation with a lot of the transaction counterparties, that process was very inefficient. It was taking folks upwards of four months to get a securitization done, and that's where I saw the opportunity.

[00:03:30] So my value proposition in the space and my advisory practice is meant to cut that timeline down to as little as four to six weeks.

[00:03:39] Rocky Butani: Nice. Uh, well, why don't we start off talking about, uh, current events in private lending and capital markets? Um, uh, b- and then we'll get into some of the, the details of how securitizations work.

[00:03:51] But for now,

[00:03:53] we're in early October 2026. Uh, tell us about the state of capital markets and institutional capital as it relates to RTL securitizations. Certainly. Well, the big news is obviously the rates are going up, or as many capital markets institutional players call it, is the rates are widening. So we've seen Treasuries jump up by about 100 basis points, which is having an impact on the rest of the, um, residential lending market.

[00:04:21] Aleksandra Simanovsky | Adige Advisory: And in securitization in particular, I think there's a bit of an adjustment. So while there are issuances being done, I think the volume has contracted or at least become delayed until the lending, um, catches up with the higher rates. So the increase in Treasuries are prompting bond investors requiring a higher coupon, while the loans that were originated up until this point have a lower coupon, so they haven't fully caught up.

[00:04:50] So I do see a bit of a delay in issuance volume, um, but I think it's temporary, especially for the RTL because, um, on a relative basis, it's a short-term product, right? The loans are a year, um, on average in length, um, which is very different than the loans in the 30-year space. Um, so on a relative basis, this is the flight to, to better yields.

[00:05:16] Rocky Butani: And the, the bond holders, um, uh, sort of pausing or taking a step back, um, due to the rates. Is, is that because if, let's say, right now the 10-year Treasury, uh, yields are a little over 5%, uh, that, that they need a significant, uh, difference or, uh, a, a significant, uh, increase in, in the yield that they get from an RTL securitization and, and those haven't really been offered as of yet?

[00:05:45] Aleksandra Simanovsky | Adige Advisory: So the way it generally works is bond issuance are a two-part, have a two-part component on the yield. Um, one part is the curve that's tied to the Treasury, and that's up to your point, over 5%, 100 basis points, uh, month over month. And, um, the other point is the spread, what investors are willing to get over that to take on the risk of holding these bonds.

[00:06:08] And there, don't see material, uh, widening. In fact, we're seeing that pretty consistent and even tightening in some cases, um, on issuances. But because the component that's tied to the market is higher, the average yield is shaking out higher. So just to give you a frame of reference, um, there was a deal done by an issuer, Archres, that just closed, and, um, their average yield was about 70 basis points higher overall from their last issuance in March.

[00:06:37] And that's largely because the index curve increased while their margin tightened. So the 30 basis point tightening or, or y- 20 basis point tightening on the spread was entirely offset by nearly a 70 basis point increase on the Treasury curve.

[00:06:59] Rocky Butani: So, so in summary, this means that lenders basically have to increase their, their rates that they're charging to borrowers, uh, in order to, to still make these, uh, securitizations make sense.

[00:07:11] Aleksandra Simanovsky | Adige Advisory: That's exactly right. That's exactly right. It's a trickle-down effect

[00:07:15] Rocky Butani: Okay. And, uh, and, and from, from the different institutional investors that you speak with, um, do they have a, a general, uh, you know, sort of consensus on, on where things are headed? Or are they... Uh, is it, is it just an, at a point where we really don't know because, because rates might go up again?

[00:07:35] Or, or do they just think that, uh, maybe just wait until next year and hopefully, uh, the, the yields will come back down?

[00:07:41] Aleksandra Simanovsky | Adige Advisory: So interestingly enough, investors have a mandate to deploy capital. They have a mandate to invest. Um, so I'm actually seeing a few reach out because they want to invest in the space where they haven't considered it before.

[00:07:53] So there's actually a flight to the RTL sector from the investor community because, um, they would rather put their money to work today in the RTL, the shorter term asset class, versus the RMBS, the non-QM, the DSCR market. Um, so I'm actually seeing investors target this for the time being. And in terms of the delay that I mentioned earlier, it's really from the issuance side.

[00:08:15] Um, so the private lenders or aggregators that are going to the market, what happens is the loans that they've aggregated to this point have a lower coupon, and the market is asking for a higher yield. So it's a matter of time before those loans, um, the average coupon goes up as new loans originate at a higher rate to borrowers, um, and that catches up to the market.

[00:08:38] But I still see strong demand, and I think it's all relative value, and RTL seems to be the flight to, um, to the sector relative to the others.

[00:08:48] Rocky Butani: That's good to know that there's still a strong appetite from, from investors to, uh, to invest in these RTL bonds. Uh, that's great. Uh, and, um, and then let's,

[00:08:59] let's talk a little bit about, um, some of the M&A activity that's happened this year.

[00:09:03] One of the big deals that happened was, uh, Kiavi got acquired by Figure. Um, and then very recently, uh, Toorak was acquired by Velocity, um, Commercial Mortgage or Velocity Mortgage. I forget the, the exact technical name. But, um, uh, just wanted to get your comments on both of these transactions and how they affect, uh, RTL lenders in general.

[00:09:27] Aleksandra Simanovsky | Adige Advisory: I mean, look, um, the outlook on this market is obviously larger firms have scale and economics, um, of scale work in their favor. Um, so those are certainly big transactions for the time being, but I don't see that as being the only ones. I'm sure we'll see others because combine and conquer eventually. Um, so I think those are going to be the winners in this widening of the interest rate environment and the flight to credit.

[00:09:56] And there's also institutional interest in this space. So because of additional interest in this asset class that used to be opaque, um, now has a lot more visibility, um, I see that as continuing. Um, the Figure transaction is interesting because obviously, um, they have not been in the residential market to the same extent, um, and they have a technology, uh, focus.

[00:10:20] So I think that's exciting things on the horizon for, um, the industry

[00:10:26] Rocky Butani: And, and how about with Toorak? Toorak, for people that don't know, um, is, is, uh, one of the largest aggregators in our space. Uh, like you said, Toorak with, uh, with your assistance was able to do the first rated securitization. Um, but they're an aggregator, and they were acquired by Velocity, which is, which is, uh, an originator mostly in, in the small balance commercial real estate space.

[00:10:49] Um, and they do some DSCR and, and a little bit of RTL, I believe. Um, w- uh, any comments or, or thoughts on the significance of that deal?

[00:10:59] Aleksandra Simanovsky | Adige Advisory: Certainly. So Velocity has been in the industry for, uh, longer than Toorak, um, so they have a mainstay and they have a captive audience. And there's a lot of overlap in the RTL sector where you have the borrowers that graduate from doing smaller residential deals to larger multifamily deals.

[00:11:15] Um, so they capture a lot of the gray market, the smaller balance commercial. Um, so having the investment in Toorak and having the acquisition, um, the connection to their, um, aggregation partners, to their origination platform as well, um, they're able to expand their offering to the captive audience they have.

[00:11:34] Um, and the same thing for Toorak. So I see a ton of synergies and, um, excited to see what they do together.

[00:11:41] Rocky Butani: Okay, great. And, uh, and

[00:11:42] since you mentioned multifamily, let's talk about that a little bit. Uh, you know, multifamily was a popular program or product for, uh, uh, RTL lenders prior to 2022 before rates started going up.

[00:11:56] And it seems like in the last three or four years, most RTL lenders have just shied away from multifamily, uh, primarily because they're... the capital markets are, uh, they just don't have an appetite for it. Um, but from, uh, you know, from the Fortra conference, uh, that I attended in, in August, I watched, uh, a panel that you moderated, uh, where, where you commented on multifamily making a comeback.

[00:12:20] Um, talk to us a little bit about, uh, about multifamily as it relates to the capital markets and, and what the appetite is for that right now.

[00:12:27] Aleksandra Simanovsky | Adige Advisory: Um, I'm a big advocate because I spent, uh, nearly a decade in commercial real estate, and multifamily is a big component of it. In fact, relative to many of the other asset classes, you have office retail, um, and so on, multifamily is one of the leading sectors.

[00:12:44] Uh, the difference in the commercial real estate multifamily is apartment buildings, and the multifamily that we see in RTL are generally five-unit, six-unit, closer cousin to the one to four residential than they are to the true commercial My view is that the product of multifamily has not been presented to the commercial real estate investors in the same light.

[00:13:10] Um, and that's a big opportunity for the future for this asset class. And Rocky, to your point, in terms of what happened in '22, um, there were a couple of players that had mentioned that their multifamily-- their platform's performance deteriorated because of multifamily. Unfortunately, because the industry was so opaque and fragmented, there wasn't enough precedent performance to indicate that they failed, not because multifamily, but because of certain players, certain underwriting risks.

[00:13:38] Um, so what happened is the entire industry was painted with the same brush in '22. And because multifamily hasn't had that, um, ability to stand on its own, the investors that invested in the past see it all in the same tone. Um, so to them, multifamily ties up to certain investors that said multifamily is bad.

[00:14:01] Our platforms failed because of multifamily, and they stopped buying bonds backed by a large portion of multifamily. So that's one component. The other component is the rating. So when the market was rated, it was rated by a group within DBRS that is strictly focused on the residential market, which means that they are not able to view the commercial assets, multifamily assets, without having to develop a new methodology because the commercial real estate group is a different department.

[00:14:32] So that limited the ability of the lenders to have an exit for multifamily Which is unfortunate because my view is in '24 when the RTL sector got rated, a ton of new investors that have pockets of money for investment-grade ratings came to the space. Up until now, the commercial real estate investors haven't been able to look at this asset because they're used to seeing the assets through a different lens.

[00:15:01] So my prediction for whether it's '27 or '28 is that if the multifamily collateral is presented in a way that commercial real estate investors can understand it in a similar way. So just to give you an example, um, in RTL, the big focus is on average metrics. So average leverage, average FICO, average geography.

[00:15:23] So if you have a pool, if you have a concentration in certain geography, that matters. Very different than the analysis in commercial real estate. Commercial real estate, they generally focus on to the specific asset, so they need summaries of individual assets, and multifamilies on average are higher balance.

[00:15:39] So one is going to have a bigger impact on a pool. Um, so if there's asset summaries, if there is, um, engineering, uh, reports, um, environmental reports, then that becomes palatable to the commercial real estate investor. And there's a big pocket of money that's targeting this market that doesn't know that this fits their criteria.

[00:16:00] So I firmly believe that if it's presented to the right investors, not only will it be, um, higher investor base, it'll possibly be rated. Pretty confident that it'll be rated, uh, because it fits a lot of the criteria that's in that space. It just hasn't crossed over. It... There-- You know what? It's not a lot of people that understand the two environments, the commercial and the residential.

[00:16:23] Um, I actually just published an article in the Private Lender magazine that focuses on the resimercial approach. Um, firm believer that it's only a matter of time for multifamily to have a lane

[00:16:35] Rocky Butani: And o- over the last few years, I have seen that, uh, a lot of RTL lenders will still fund, uh, multifamily between five and eight units, or maybe sometimes the, the cap was 10 units.

[00:16:47] Whereas prior to 2022, I'd see RTL lenders that some of them, uh, were 100% focused on, on the small to medium size multifamily going up to 20 units or 30 units. And in RTL, the, the maximum loan size typically tends to be less than 10 million- Yeah ... maybe even 5 million. So, so the multifamily we're talking about is just basically over 10 units as, um, as between 10 and let's say 30 units.

[00:17:13] Aleksandra Simanovsky | Adige Advisory: That's right. That's right. But to be honest, anything over five qualifies as commercial and multifamily. Even though there's a big difference between a house that has five units and one that has 100, that's a true apartment building. Um, but there's certainly a lane that is, um, in between. So before '22, RTL securitizations that were not rated had up to 70% multifamily.

[00:17:36] So there was a true exit for that collateral. Now because of that investor reduced appetite, it generally doesn't go above 50%. In fact, there was only two deals that had above that number. Um, there was a Toorak deal done, um, that actually ran in the beginning of '25, um, that had 100% multifamily and it was not rated.

[00:17:57] But to this day, it has a really low percentage ra- um, delinquency, I think sub 3%, which I think is an important proof of concept. Um, there was another one done by Ice Capital that's 85% multifamily. Again, not rated, small, uh, pool of loans, but that's proof of concept. However, it was still presented in the lens of the RTL investor.

[00:18:18] Um, in the future, if they're presented in a slightly different aspect, um, there's a ton of opportunity to present them to the commercial real estate buyers. Especially now when the retail, the office markets are somewhat spaded, um, they're definitely a flight to multifamily and this could fill that gap.

[00:18:39] Rocky Butani: And, uh, f- going back to what you said earlier is a lot of the RTL lenders would, uh, would have a mix, uh, of, of the residential and the multifamily, and then the multifamily took a big hit, uh, as far as performance, uh, when the rates went up in 2022 more than the residential. Uh, but moving forward, uh, do you see lenders maybe bundling more multifamily and not mixing it, or do you think it'll still be, uh, it'll still be just a, a percentage of, of the total portfolio?

[00:19:08] Aleksandra Simanovsky | Adige Advisory: Um, so one point of clarification, the multifamily that failed were associated with a select, um, issuer. Unfortunately, historically, there was nothing that said it's multifamily performing one way versus non-multifamily performing a different way. Um, so it all got gobbled into multifamily doesn't perform well in general.

[00:19:31] I certainly see a future where it's multifamily only bifurcated, um, in its own lane, because it could be presented to folks that wear two hats and folks that both see the potential on the resi side and the commercial side

[00:19:48] Rocky Butani: Makes sense. All right. Um, all right, why don't we switch gears? Let's, uh,

[00:19:53] let's get into, uh, talking about more about securitizations and explaining this to the audience.

[00:19:58] Because, you know, we have a lot of real estate investors, a lot of brokers, smaller lenders, uh, that don't have any involvement in securitizations, but, but it, it's talked about so much. You get these larger lenders that put out a press release whenever they do a securitization. Maybe the real estate investors see it, but they don't know what that means.

[00:20:16] Why should they care? Um, you know, and, and so I, I think a lot of people, uh, should pay attention to what's happening in securitizations, but I, I, I'm assuming that most people don't understand the ins and outs of how it works. And, and I'm sure there's a lot of lenders that are, uh, that are growing and may think about a securitization and, uh, uh...

[00:20:35] So I, I think it, it needs some explaining from an expert like yourself. So I wanna get a little deep into, into explaining to people how securitizations work.

[00:20:44] Aleksandra Simanovsky | Adige Advisory: Well, actually before that, Rocky, I'm really glad you asked this question because that's entirely the premise of Adige Advisory. Because I essentially act as Google Translate.

[00:20:54] I found in private lending there are fantastic operators, there are great originators. Because the industry has been so disconnected from the major capital markets for a long time, um, there's a big, to your point, disconnect in understanding what the two sides are saying. So that's exactly what Adige is.

[00:21:14] I'm, I act as Google Translate between the two sides. Um, and it's funny enough, um, it's not a complicated concept, it just things are called different names so it doesn't click into place. Um, so just to give you an idea, um, in 22 when rates increased, um, a lot of the capital markets folks would say the rates widened.

[00:21:33] And a lot of the folks in private lending had no idea what that meant. The That's, that's just that simple, right? It's just calling things different names. And all it is is, um, the securitization is basically a package of the loans that are aggregated. Um, and instead of selling the loans, which is what most of the private lending has been doing, the cash flows from those loans are sold.

[00:21:57] So the loans are pledged to a trust, a bankruptcy remote trust that exists whether a, um, lender stays in business or not. Um, so it becomes this banks- bankruptcy remote entity, but then the cash flows of that trust get sold to investors. The way it works, so if you have a pool of loans, say $150 million, and those loans every month have a 10% interest rate.

[00:22:22] So over a year, they are supposed to generate, um, $10 million of cash flow. And the way it works, that cash flow gets allocated to the bond investors. So they're buying that guarantee of payments in the future. It's similar to how a lender gives a mortgage to a borrower, right? The same concept. You are guaranteed that borrower to make you interest payments and the principal payment at the end.

[00:22:45] The same exact con-concept works for the bond investors. So they get a pool of loans, they get guaranteed payments, but at the same time, they pay the lender day one. So they're not waiting for that money to come in from those borrowers. The same thing in a mortgage, right? You lend the money so that the borrower can make the-- build the property, um, buy the property.

[00:23:08] Um, so they come up with an equity piece, and that's usually, um, in a bond issuance, 5% or 10%. And then the bond market gives you 90% back. Okay? Um, for that 90%, you give them a coupon. Now bond investors, their coupons are set very differently than the borrowers on the mortgages. Those investors want a coupon, and the way they actually separate out the cash flows.

[00:23:33] So that $10 million of payments from those, um, borrowers, they get applied from the top down. So assuming everybody makes their payment, everybody gets paid, whether you buy a senior bond or a junior bond. Um, however, um, if the borrowers stop paying, the cash flows at the top still get paid Um, down the stack, if the money runs out, then the junior-most bond holders, um, do not get their payments.

[00:24:02] So essentially they're taking more risk. So the senior bond holders accept a lower coupon because they're taking less risk. And then similar to how you get a mortgage, you could get a senior lien, you can get a junior lien, the same exact concept. So that's the securitization in a nutshell. That's kind of connecting the two understanding, so that should really help kick it into place.

[00:24:26] Rocky Butani: That does help, and I've actually never heard it explained that way where you compare it to how the, the originator, the originating lender offers a loan to the real estate investor. That's, uh, that's an interesting way to, to look at it. Okay. Um, and then so, so let's say there's a, there's a lender out there.

[00:24:43] They're... Historically, they may have been selling individual loans and, and the reason they do that is they need to recapitalize. So let's say they have a million dollars, uh, they fund the million-dollar loan, then they, uh, they, they maybe start getting payments or maybe it's not even the end of the first month, but they sell the note to an investor, uh, and recapitalize so they can go lend that out to, to, on another deal, to another borrower.

[00:25:08] Um, so with, with, uh, a securitization, the, the lender is essentially just pooling a ton of loans, uh, altogether and then offering that to a much bigger investor. Um, or, uh, so they're not selling the loan. Like you said, they're, they're selling the cash flow of, of the, the interest payments, right?

[00:25:27] Aleksandra Simanovsky | Adige Advisory: That's right.

[00:25:28] That's right.

[00:25:30] Rocky Butani: Okay. Got it. And then so who are these bond investors? Um, uh, what, what types of institutions are these and, uh, tell us a little bit more about the buyers or the bond holders.

[00:25:42] Aleksandra Simanovsky | Adige Advisory: Certainly. It really varies. Um, it's everybody from hedge funds, money managers, and for the rated securities, it's insurance companies.

[00:25:51] So it's any institution that is holding to capital that has a mandate to put that money to work and generate a return. Now, the return for those investors, because they're deploying such a big portion of money, um, their hurdles, their return hurdles are lower. So, um, in terms of, um, economics of comparing the loan sale to a securitization, um, the loan sale generally has a coupon.

[00:26:18] I think now it's probably, um, 8%, eight and a half, right, uh, for the sale of the loan. Um, now the bond investors, because they're not buying one-off, one loan, a pool of loans, they're buying cash flows of $100 million-plus pools, um, they're comfortable with something around seven and a half percent, which means that instead of making a profit margin of one, one and a half percent, you're making a much wider profit margin in a securitization.

[00:26:45] Now, the catch to that is obviously you're fully recapitalized if you sell the loan. If you're pledging it to securitization, you are, um, your advance rate is 90% and you're still required to hold that equity piece. Um, so that makes economics a little differently. However, um, your return on equity becomes exponentially higher the more of that pool you could sell to investors.

[00:27:09] Rocky Butani: Okay, so as far as the economics,

[00:27:10] let's say the, uh, the lender, uh, issues a loan to a borrower. Their f- uh, their interest rate is 10%. Uh, if they were to sell it individually to one aggregator, uh, or note buyer, they, they sell it at eight, so they have a profit of two, plus they've, plus they've charged origination fees.

[00:27:30] So that's, that's their, their profit. So the idea with securitizations is, is the reason that a lender would do a securitization is they just get a bigger profit, uh, on the loan because the securitization or the bond, uh, is issued at, at let's say seven instead of eight. So there's an extra 1% of interest that the lender would get as a, as a profit, and that's, that's kind of the whole, that's the whole reason for doing this.

[00:27:55] It's just a, um, a, a lower cost of capital is typically what, what lenders say, right?

[00:28:00] Aleksandra Simanovsky | Adige Advisory: So actually we'll go a step further. So I am a firm believer that economics are not always the driver for securitization. Um, there's a big component of flexibility That for a growing platform, it's key to surviving because a lot of the loan buyers, as we've seen in '22 or during COVID, they're quite temperamental, right?

[00:28:22] What they buy today may be different what they consider buying tomorrow. So securitization creates additional stability in your platform because the way that RTL securitization are structured is they have a revolving component. So once you set a box, a set, uh, eligibility criteria that actually lines up with what your production looked like in the past, as long as your loan matches that criteria, there's nobody there who's gonna change their mind for the next two years.

[00:28:49] So it gives you a lot more security. Um, so not to say it's the only, the one-and-done, um, sort of transaction funding vehicle, but it's one that creates a little more staying power. Because in 2020 and '22, there was a lot of lenders that relied solely on the buy activity, and they had to go out of business or get acquired because of that lack of liquidity in the market.

[00:29:15] So it creates staying power. The other thing is, um, it eliminates the back and forth because a lot of the buy boxes have gray area and flexibility, so something that may fit a box and somebody lends a loan may not always work. You don't have that conversation with bond investors because as long as it meets the criteria, you're set.

[00:29:36] So I think it adds that, that flexibility and staying power in the long term.

[00:29:43] Rocky Butani: Makes sense. Uh, okay, yeah, that, that's, those are good points. Um, because typically, uh, before securitizations became more common for, let's say, your middle-tier originators, um, uh, typically everyone was just selling to aggregators.

[00:29:58] And, and, um, and, and are aggregators still a big player in the space or, or is everyone just going direct to securitization?

[00:30:06] Aleksandra Simanovsky | Adige Advisory: Absolutely. I think, like I said, securitization is not the only funding mechanism, it's a funding mechanism, so I think there's still an ask and a bid to the extent that loans may not fit a securitization, so it's good that there's other door two and option three that's available.

[00:30:23] Um, so there's definitely still demand, although there is always some fallout that creates, um, inefficiencies. Um, so I think a shop that has the ability both to sell, um, and to securitize is ideally fit for the next cycle

[00:30:44] Rocky Butani: But typically aggregators, uh, it seems like their buy box or their requirements for a loan are similar to what you'd put in a securitization because they're both institutional capital.

[00:30:56] Um, so are, are there, I mean, are, are there, are the aggregators just doing, uh, deals with a slightly more hair on it? Or, or what are some of the other reasons you would, uh, you would work with an aggregator?

[00:31:09] Aleksandra Simanovsky | Adige Advisory: Um, I think it's, it's funding, it's timing too, right? Um, so for example, every base securitization is done at different times.

[00:31:16] So somebody, uh, who's doing securitizations now may have a yield of 7.5% and they need to originate a loan that's at, um, a tighter coupon. They may not always put it into that vehicle securitization. So it's a matter of finding the economics that work best. Um, there's also the opportunity of certain pools have criteria that multifamily, for example, right, to the point we talked earlier, they have a cap of 530%, what have you.

[00:31:44] So if there's a loan that fits a criteria in somebody else's box, there's opportunity for that exit there too. So it's not necessarily there, it's just a matter of the market conditions

[00:31:55] Rocky Butani: And, uh, from what I understand, to do a securitization, you have to have a, a lot of loans. Like, it has to be a big dollar amount.

[00:32:01] We're talking maybe 50 to $100 million worth of loans. Does, does that about right?

[00:32:06] Aleksandra Simanovsky | Adige Advisory: 100 million is the starting point, um, that's generally been the target.

[00:32:11] Rocky Butani: Okay. So let's go through, uh, some of the details as far as, um, as far as the money flows and, and, and the notes and the loans. So let's say there's a, a lender who's originated $100 million worth of loans.

[00:32:24] Uh, they, they maybe, uh, maybe they have a fund that they've, that they've raised, raised capital in. They've got, uh, a bank credit line that's, that's helped them capitalize these deals. They've got their own, uh, money into it. Let's say they've, they have 10% of their own money, uh, put out on these loans. Um, and then, and then they want to do a securitization.

[00:32:45] Um, so you mentioned that they still have to hold, uh, an equity piece. So let's say they still have to have 10% of their own money tied up into it, so they're not getting a full recapitalization. Um, uh, so when, when they put the, the loans in this trust, uh, as, as what you mentioned, right? It's a trust. Um, and then the bond investors will, will get the income.

[00:33:09] So the bond investors are not holding the loans. It's in this, it's in this trust- Mm-hmm ... um, that sits in between the lender and, and the bond investors. Um, uh, so, so every time a loan gets funded, is, is the l- the lender assigning the note to this trust, or does it go directly into the trust, uh, upon funding?

[00:33:30] How does, how does the, the note, uh, uh... How, how, how do you deal with the note in this situation?

[00:33:36] Aleksandra Simanovsky | Adige Advisory: Yeah. It's assigned to the trust. That's exactly right. So, um, the proceeds of the loan get reimbursed out of the proceeds from the trust. Um, and because the loans, uh, or the securitizations are set up re- with a revolving period, that essentially happens, um, as often as monthly for these deals.

[00:33:55] So the, uh, originator, um, so long as the loans are closed, um, they are funded out of the securitization.

[00:34:02] Rocky Butani: Okay. And, and then, um, and then so, so as a loan gets paid off, uh, the... does the lender have to replace that loan with another one in the securitization so that the same amount of money is in there?

[00:34:18] Aleksandra Simanovsky | Adige Advisory: That's exactly right. Or they can also replace it with cash because there's a certain limit on collateral. Um, that said, it's a very inefficient use of cash because the loans still require that you make a, a coupon payment to the bond investors. So if you're picking- paying a coupon on cash and not earning any interest from a loan, then you have a tremendous cash drag that is inefficient for your funding.

[00:34:44] Not, um, you know, during COVID, there was a short window where a lot of the securitizations were getting paid off, but there wasn't enough production because a lot of the lenders pulled back, uh, to backfill, and that actually happened. So for a short period of time, there were less loans, and they were supplemented with cash because there wasn't enough production.

[00:35:08] And I'd actually caution some s- lenders that are considering securitization because you can essentially issue a securitization with 100 million without having $100 million in loans. You could have that as a, um, pool, uh, of just cash until the loans are funded. However, you're still required to make that bond payment.

[00:35:27] So if your cash isn't making that profit for you, then you're just bleeding cash to make that bond payment

[00:35:34] Rocky Butani: So the risk to the lender, to the originator is they have to be sure that they can fund more loans to fill in that gap whenever a loan pays off. There has to be another one replacing it that's generating, uh, interest payments so they can pay the bond and they can make their profit as well.

[00:35:50] Aleksandra Simanovsky | Adige Advisory: That's exactly right. Um, and actually, just to backtrack to your question earlier, in terms of why would an originator consider a sale versus a securitization, um, there may be a time where because you securitize, you're able to offer a lower coupon to your borrower. If you're offering a lower coupon, you're gonna increase your volume in originations.

[00:36:11] If you increase your volume in originations, you may originate more than your securitization have capacity for, and in order for you to generate that yield, you may consider in a certain month to sell a portion that doesn't, um, fit. So for example, if you have $100 million securitization and you only had $10 million pay off, but in the same month you originated $20 million, you may consider selling because you're gonna make a higher profit margin on the sale, especially if the rates like today are higher for the-- or more efficient for the loan sale than they are for the securitization.

[00:36:46] Um, so that's a true consideration.

[00:36:49] Rocky Butani: Okay. And, uh, when a lender does a securitization, are they typically still servicing the loan, so they're collecting the payment from the borrower, and then they're paying the interest, or they're paying the bond interest and then keeping their profit? Is that how the money flows?

[00:37:02] Aleksandra Simanovsky | Adige Advisory: So that's exactly right. Um, for the longest time, the RTL investor community wanted a third-party servicer, where the third-party servicer collects all of the payments, whether it's interest on the loans or payoffs on the loans or default interest or any other fees. It all goes into a pool, and then all of that pool of payments gets allocated to the bond investors from the top down, and whatever's left over goes to the, um, equity, um, holder, which is the issuer.

[00:37:31] Um, one interesting thing to consider is a lot of times the loans that default in these securitizations actually generate a higher return, and that higher return gets passed through to the excess interest holder, which is the lender, and that bond is actually valued higher, both because it's generating more proceeds and because it's also riskier, because if there's not enough to pay down the waterfall, they're the first to take a loss as well.

[00:38:04] Rocky Butani: Okay. Yeah, that makes sense. Uh, obviously the, the bondholders don't wanna, uh, have any, any risk. That's why they're, they're paying a lower, a lower coupon, um, or they're taking a lower coupon. Um, so i- in that case where, where a loan does go into default and, and maybe it goes to foreclosure, um, uh, so, uh, uh, what you were saying is that, is that it, it generates more, um, it, more revenue because, because there's default interest, um, that's being collected.

[00:38:33] But- So

[00:38:33] Aleksandra Simanovsky | Adige Advisory: one nuance- But what if- Uh, one nuance- Mm-hmm ... one clarification. Uh, when a loan defaults, it doesn't necessarily generate because the borrower's not making the payments, right? They go into default- Yes, correct ... because they stop making payments. However- Mm-hmm ... um, in the RTL space, the short-term space, the resolution after a default is m- much faster than it is in the consumer world.

[00:38:54] So a lot of cases, the borrower may go into default for three to six months, and still end up either paying off the loan through a refinance or paying off the loan through a sale of the property. Um, during that time, they would've incurred the default interest. That gets passed through at the time of the property resolution.

[00:39:13] So it's not during default, but it's really after the resolution

[00:39:18] Rocky Butani: So if a, a lo- a loan goes into default, it's, it's in the securitization, uh, maybe the, the bond investors get the reporting that, hey, there's a few loans in default. But to them, it's not as much of a, an issue because the issuer, the lender, is still paying them, uh, what they owe.

[00:39:39] They're still, they're still making their, their bond payments. Uh, right? Okay. So the lenders, the lenders taking that loss, uh, um, you know, where they're not collecting the interest payments from the borrower.

[00:39:48] Aleksandra Simanovsky | Adige Advisory: That's right. You're absolutely correct. Um, the one thing to consider is they're still making their payments, and the securitization vehicle is incredibly important in RTL space because the loans that paid off get backfilled, which is very different than the non-RTL loans, where you have a pool of loans.

[00:40:12] If they default, if they stay in there, they're all gonna eventually, um, cause losses. In RTL, because bad loans stay in the pool but they're replaced by new loans, you're always gonna have cash flows or payoffs that offset some of those defaults for the time being. So, so long as there's an originator that's making new loans and creating new cash flows for the pool, they're really offsetting the particular loans.

[00:40:39] Um, so that actually brings me to two ud- other points for bond investors in this asset class, um, they consider. Um, one is before an issuer, a securitizer, would let losses pass through into a securitization, they have to really consider, um, bigger operations because if they'll... So there's triggers in the deals, and the triggers are 10% of, uh, 60-plus delinquencies and 5% of 120-day delinquencies, at which point it turns off their ability to add new loans to the pool.

[00:41:14] If issuers aren't able to add new loans to the pool, they don't have access to this efficient funding vehicle. So a lot of times issuers will actually not only put new performing loans to mask or to mitigate some of those losses, but they actually can buy out some of the non-performing loans to manage the delinquency levels because to them- They would no longer have access to this source of funding if they default and stop paying bond investors.

[00:41:50] So from that perspective, for bond investors, the underwriting of the issuer is sometimes more important than actual loans in the pool. Because if they have the ability, if they have the liquidity to manage the pool where irrespective of losses, the bond investors would take a loss, that's really the value to the bond investors.

[00:42:10] To your point earlier, they continue to collect their coupons, so they should not be as focused. Because a lot of times in static pools that are in other asset classes, delinquencies mean that investors will take a loss. That's not always the case in RTL because there's active managers that make sure that securitizations stay live and they continue to pay their bond investors

[00:42:34] Rocky Butani: And, uh, and as far as the, the money flowing, um, so once, once there's, uh, $100 million worth of loans that, that get securitized, at that time that the securitization closes, is the lender getting $90 million just, just from the securitization?

[00:42:54] Like it goes from the bond investors directly into their operating bank account to do new loans?

[00:42:59] Aleksandra Simanovsky | Adige Advisory: That's exactly how it works. Um, in fact, a lot of times, um, those loans are in warehouse lines, right? Not all of the funding. So they get paid off to the warehouse lines, and then you have additional capacity to make new loans.

[00:43:10] That's exactly right. And then, um, the other thing to consider there is there's cost that come hand-in-hand with the securitization. So out of those proceeds, those costs are covered

[00:43:22] Rocky Butani: Uh, okay. So you-- the cost to do securitization includes things like, like legal or advisory. There's probably an investment bank involved in that.

[00:43:32] Is that, that, that's what you're referring to as far as costs?

[00:43:35] Aleksandra Simanovsky | Adige Advisory: That's exactly right. Um, just one misconception in the space, you know, the number by itself is somewhat alarming. It's for a million-dollar, um, deal, it's probably a point or, you know... Sorry, for a hundred million dollar deal, um, the cost for securitization is probably a million, slightly higher than a million.

[00:43:53] So that number sounds alarming. But two things to consider. One, it's a one-time cost to get a securitization put in place that is meant to fund not only a hundred million day one, but a hundred million for two years of production, meaning as loans pay off, you're backfilling with new loans, so you're essentially recycling that hundred million three to four times.

[00:44:16] So the hundred million of notional today is really four hundred million dollars in loan production that you're funding over the course of the deal. That cost of one point is essentially a quarter, right? Divided by three, divided by four, however terms of the collateral you have. So at the end of the day, that million large number is really probably only 33 to a quarter, um, of that cost, uh, which is quite manageable.

[00:44:43] Not only that, um, the issuer's not coming with that money out of pocket. They're offsetting it because they're getting additional proceeds from the pool that goes back to fund new loans. Um, and there's a savings because usually the securitization yield is lower than that they get in the warehouse or the other markets.

[00:44:58] Um, so it economically, the cost is not as alarming once you kind of put the numbers and see visually.

[00:45:05] Rocky Butani: Okay. So, so technically when the securitization closes for $100 million deal, uh, then the lender would get... they would net $89 million, uh, that they could use to start funding new loans.

[00:45:18] Aleksandra Simanovsky | Adige Advisory: That's exactly right.

[00:45:19] Rocky Butani: Right. Okay.

[00:45:20] Aleksandra Simanovsky | Adige Advisory: Got it. And the cost of doing that- Okay ... is about 25 basis points.

[00:45:23] Rocky Butani: Yeah. Makes sense. Okay. And then, and then for...

[00:45:26] so are all securitizations for RTL, are they all two years? Is that just a standard with bond investors that they want a two-year term?

[00:45:34] Aleksandra Simanovsky | Adige Advisory: Um, there have been a few that went a little longer, kind of testing the waters.

[00:45:38] Um, so far, two has been the standard. That's generally the case, and they have a six-month tail to pay down the bond investors. Um, but not to say that they can't be longer. In fact, I fully envision the multifamily asset class to be a longer, um, hold because aligns to the, um, small balance commercial asset class that usually is a three-year period.

[00:46:04] So evolution of the market- And so- We'll see.

[00:46:07] Rocky Butani: Sure. Uh, hopefully. And then, uh, so what happens at the end of the two-year term? Um, how does this get, get all closed up and, and I'm assuming there's no renewal. Do you have to do a, a brand-new issuance and a new deal, right?

[00:46:21] Aleksandra Simanovsky | Adige Advisory: That's right. So two things happen. At the end of two years, amortization begins and the revolving period stops, meaning you, um, as loans pay off, you no longer can backfill them with new performing loans.

[00:46:33] So after two years, you have a pool, let's say in $100 million issuance, you have $100 million worth of loans that, um, pay down. Those payoffs are all a- adding to the top of the waterfall, and all of that is being paid to the, um... it, it's fees, but then bond investors and they pay down the bond. So it's similar to a mortgage, right?

[00:46:56] If you have an IO for two years, uh, for two years you only pay the interest rate. And, uh, after two years, you're paying down the principal, but you're paying it down with all of the proceeds. So as the loans are paying off, you're paying the bond holders up until, um, you get to 25% of the A class outstanding, um, and then you could buy it back.

[00:47:15] Um, so you could either buy it back and put it in the warehouse line, or you could do a new securitization and backfill with those loans. Um, most of the issuers usually have a cadence of about one deal a year, so that as one falls off, they don't necessarily take those loans and put it into a new pool.

[00:47:32] They could put it into other securitizations that are active at the time

[00:47:37] Rocky Butani: Okay. And then, but one- once it's, once the two-year term is up, like you said, the, whatever pending loans are still, are still, uh, out there, you know, um, uh, that are still active loans, they need to be paid off. Um, so there's still probably another year term where that, that s- securitization vehicle, that trust stays open to collect those, the payments from those loans.

[00:48:01] Aleksandra Simanovsky | Adige Advisory: That's right. So one thing to consider. They're... The deals are generally set up with a disincentive to let the issuer hold onto it for the full year. So what happens in month six is if the bonds are not paid off, the interest rate steps up. A lot of times that 6.5% coupon, um, steps up to either 7.5 or 8%. So it becomes very inefficient for that lender, for that issuer to keep it alive.

[00:48:29] So they're almost incentivized to buy it back and put it into a new deal, assuming the rate environment is conducive to that.

[00:48:36] Rocky Butani: But that could be a lot of money. Let's say there's, what? I don't know. Let's say there's $50 million worth of loans that still need to be paid off, uh, after that two-year mark. Um, you mentioned that they could get another securitization.

[00:48:48] So if they, if they're, they're able to get that new securitization, they can just, uh, transfer the, the loans, the notes from, from the old securitization to the new one?

[00:48:59] Aleksandra Simanovsky | Adige Advisory: They can for the performing loans. For the non-performing loans, they'll have to either find another vehicle, sell NPLs, or hold onto them and wait for their pay day.

[00:49:09] Um, but a lot of times, that's exactly what happens. And to be honest, um, after six months, you're probably left with not 50 but $25 million in pool, in loans. Um, so it does pay down in six months quite heavily. So it's usually, you know, 10 to 20% every month. So in six months, you could be down to on average, probably $25 million.

[00:49:29] And average numbers, you're probably gonna have 80% that's still performing, 20% that's not. Um, so you manage your NPL similar to the way you do on balance sheet

[00:49:40] Rocky Butani: All right. Excellent. Okay. With that, why don't we take a quick break and we'll be right back.

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[00:51:49] All right, and we're back with Alexandra, uh, talking about securitizations and, uh, so a few more questions about how securitizations work.

[00:51:58] Um, you mentioned earlier rated and unrated. Tell us a little bit about, uh, about what a rated securitization means and, uh, and what the significance of that is for a lender.

[00:52:11] Aleksandra Simanovsky | Adige Advisory: Certainly. Um, rated securitization means you have a-another transaction party during your issuance of the deal, namely the rating agency.

[00:52:19] They review your collateral, they review your information, they review the entity, the lender, um, the issuer, and they come up with a, um, credit enhancement levels, which means that they figure out how much of the loans will be, A, um, less riskier, uh, B bonds are more riskier. Uh, they come up with ratings essentially.

[00:52:43] Um, generally the A-one is around seventy-eight percent, um, and then it's eight, eight, and so on. Um, the significance of having a rating agency means that there are at least two tranches of bonds that could be sold to investors that have a mandate, that have a requirement to buy investment-grade rating.

[00:53:05] So a lot of times insurance companies, because they can't take additional risk, they will only be allowed to buy investment-grade ratings. That means you ha- you could have a ton more investors in your deal than you otherwise would because the hedge funds, they don't have as much regulations. Some of the money managers don't have as much regulations.

[00:53:24] Um, but then the insurance companies have quite a bit, and that rating allows you to have a lot more investors in your deal. The consideration, kind of the why would you consider going rated versus not rated, um, it really depends on how big your issuance will be. So just to give you perspective, if $100 or anything really under $200 million issuance is being considered, um, there's probably a handful of investors that could help you execute with just 150, 175.

[00:53:56] If you're thinking of a securitization that's $200 million or more, you probably want more players to consider your securitization, right? Because of demand and, um, um, economics. So that said, there's also cost for hiring a rating agency. Um, so again, $200 million, if the cost is, um, a certain percentage, um, it is not as material for a $200 million deal versus $100 million deal.

[00:54:25] So if their cost is, say, $100,000, um, it's one point, um, on a $100 million deal versus, you know, half of that on a $200 million deal. So those are all points of consideration. Um, the main consideration, um, if you are issuing a $200 million, um, is eligibility criteria. So- One of the requirements for most rating agencies is that, uh, because it's a residential unit that's doing the ratings, they cannot have commercial assets in the pool, or they limit it up to 5%.

[00:54:59] So if there's a platform that does more than 5% commercial multifamily loans, they wouldn't be eligible. They wouldn't be able to get rated. Um, ground-up is another consideration. I think, um, rating agencies allow up to 30% ground-up. So if an originator does materially more than that, they wouldn't consider a securitization that's rated.

[00:55:22] Um, but it does bring value because the other component of considering securitization is you're opening up your platform to a lot more investors that you wouldn't have otherwise, right? So if you're only selling loans, your only partners are the loans you're inter- or the, um, transaction parties you're working with.

[00:55:38] But in a securitization, you could have a pop list of upwards of 10 new investors that now know your platform. So when the headwinds change, when there is a downside in the cycle, you have additional opportunities for capital that you wouldn't have otherwise without a securitization. Um, some points to consider for rated.

[00:56:00] Rocky Butani: So, so the bottom line with rated for a lender is that, uh, they get access to more, uh, to more bond investors- Was it for- ... like you said, insurance companies. But what about, uh, the, the, the coupon? Is that, is the cost of capital lower for a rated securitization-

[00:56:16] Aleksandra Simanovsky | Adige Advisory: It is, um- ...

[00:56:17] Rocky Butani: versus a rated, unrated?

[00:56:18] Aleksandra Simanovsky | Adige Advisory: Absolutely.

[00:56:19] Because you have a lot more players in the sandbox, and, uh, that drives... So as your supply is limited and your demand is higher, you can drive down pricing. So that's exactly right. So there's usually about a 50, 75 basis point difference in rated- Mm-hmm ... versus unrated.

[00:56:36] Rocky Butani: Interesting. So if, let's say, the, an unrated securitization might be 7%, uh, coupon, then, uh, un- a, a rated one might be six and a half?

[00:56:46] Yeah. So that's, that's a 50 per- uh, 50 basis point, uh, extra that a lender would get, um, and, and profit.

[00:56:54] Aleksandra Simanovsky | Adige Advisory: That's right. Okay. As long as the collateral matches the rating.

[00:56:58] Rocky Butani: Sure. So they just have a tighter box on, on, uh, on what they would, they're willing to, to take. That's right. Okay. Excellent. And, um, and

[00:57:06] when, when you mentioned that, that there's multiple investors, so, so if, let's say there's, um, a lender has this, uh, securitization issuance.

[00:57:14] They, they say, "Hey, I've got $200 million of loans. We're looking for investors." Do you... So you have typically multiple investors in, in each, in each of these securitizations? It's not just one institution, right?

[00:57:27] Aleksandra Simanovsky | Adige Advisory: That's exactly right. In fact, you have certain tranches that have different set of investors. Um, not all the investors will invest in the A class that would invest in the B class.

[00:57:38] In fact, B class you usually have one or two willing to take on that risk, and the A-1 bond will have the most number of investors because that's the lower risk.

[00:57:48] Rocky Butani: Okay. Uh, could you explain to us this A and B, uh, tranche? Um, uh, if, if let's say there's a $200 million securitization, the lender has, you know, they, they have the loans that they typically do are, are generally the same box.

[00:58:02] They're fix and flip. They're bridge. They're ground of construction. What, what do you mean by more riskier in, in the B- Certainly ... part of this?

[00:58:10] Aleksandra Simanovsky | Adige Advisory: Yeah. So the way that securitizations work, they're not bifurcating loans that go to certain tranches, they're bifurcating the cash flows. So all of the loans become a big hodgepodge of a pool, um, that has average FICO, average LTV, average, uh, percent ground up, and so on.

[00:58:27] All of the payments from all of these loans are then collected in a big pool, and all of those cash payments are then trickling down to the bond investors from the top down. So the A1 investors get paid first. Um, so it's very unlikely that the A1 investors are gonna run out of money. So once the- they're paid what they're owed, then it goes down until the lower class tranches.

[00:58:52] So the M classes after the A1s and then the B classes and so on, um, which means that the A1 notes are taking the least amount of risks, and because of that, they have a compensating, um, lower coupon. Now, the B tranche investor is taking the most risk. Chances are, if the borrowers in this pool of loans stop making payments, those, um, the pool of money that's available to pay them is likely to run out.

[00:59:23] So because they're taking more risk, they'd like a higher premium on their coupon, so they usually have a higher coupon.

[00:59:28] Rocky Butani: But isn't the coupon determined when the deal's first done?

[00:59:32] Aleksandra Simanovsky | Adige Advisory: So there's a coupon from the borrower, which is different than the coupon or the yield that the bond investor is requesting.

[00:59:41] So the coupon that the borrower is paying gets into that pot of payments, of available money to pay down the bond holders and that, um... So let's say for example, a pool of loans that's on average 10% is going to generate a pot of $10 million for a year for a $100 million issuance. So then that 100 million gets paid down to the bond investors, um, based on what their coupon is.

[01:00:05] Now, their coupon's, the way that's set is based on market dynamics. Um, a lot of times the investment bank that gets hired on a securitization, they see market pricing and they propose, um, initial price chop for the A1s and A2s and the Ms and the Bs and so on based on what the market is requesting. Now, those levels, so that 10% coupon, those payments are usually, um, irrespective of what the bond holders get, um, in the scenario.

[01:00:33] So the A1s will probably have like a 6% coupon and the M and the Bs has an 8% coupon. So they, on a weighted average basis, shake out to somewhere six and a half. Okay? Um- So those payments, those pot, um, of money gets paid down first irrespective of what the borrower's paying because that's what the bond holders require.

[01:00:57] Now, if you have a pool of 10 investors that are willing to pay a price and you're only issuing, let's say 80%, so $80 million in the A-1 bond, uh, but you have investors wanting to buy $200 million of that A-1 bond, um, you're oversubscribed. So there's $200 million of money chasing $80 million of bond proceeds.

[01:01:20] Um, so what happens is the investment bank will tighten those spreads. So they'll go from an offering of 6% to 5.5. Some investors that were part of that 200 million may not want to buy it at that rate. Um, they would fall out and there may be others that will stay in. So that's what happens when you have a lot more investors and the demand for those bonds.

[01:01:45] Um, so the rating helps when you have a lot more buyers chasing fewer loan-- fewer bonds that are offered

[01:01:52] Rocky Butani: But if, if let's say you have your initial, uh, offering that has, um, let's say there's 100 loans and 20 of them are on the riskier side, and you have these bond investors that say, "Hey, I like the riskier stuff.

[01:02:06] Um, I'll take that and at, at this, uh, yield is what I want." Um, but once the loans get paid off, does the lender have to replace those riskier loans with other riskier loans so that the bond investors get their same, uh, yield that, that they were expecting?

[01:02:23] Aleksandra Simanovsky | Adige Advisory: That's correct. So the bond investors are not necessarily buying the pool of loans, they're buying an eligibility box.

[01:02:30] Um, so just to give you an idea, there's one issuer that has a credit box that set- allows, uh, FICO scores as low as 550. Um, and that is a wide credit box, and they're offering 100 basis point higher yield because of that wider credit box. Now, because that allows them to buy loans that fit that criteria, not every loan's gonna be at 550, but they have the capability to buy that loan.

[01:02:57] So they're gonna always produce a loan that has a higher coupon so they could pay their bond investors because of that.

[01:03:03] Rocky Butani: Okay. That makes sense now. Okay. All right. Got it. That's, that's, uh, that's good to know. I, I didn't realize that there was that, these different levels of, of investors and, and, and a securitization.

[01:03:14] Um, that's fascinating.

[01:03:16] Aleksandra Simanovsky | Adige Advisory: Mm-hmm.

[01:03:16] Rocky Butani: Uh, okay. All right. Um, okay,

[01:03:19] why don't we, uh, switch gears and talk a little bit about, uh, about you and your company and the services that you offer and, and how you work with lenders. Um, let's start with maybe, uh, uh, you know, you told us a little bit about your history in, in private lending.

[01:03:33] Um, maybe tell us a little bit about the company that you started and, and the services you offer.

[01:03:38] Aleksandra Simanovsky | Adige Advisory: Certainly. Um, so like I said, securitization for somebody that understands it, it generally takes four to six weeks. And because in RTL space in particular there's a revolving component, any particular issuer does not need to do a deal more often than once, say, every year or half a year, which means that a capital markets team that's solely focused on securitization may be excessive for a lender.

[01:04:04] Um, so the premise, the value proposition of founding Adige is to be a fractional support for when that lender may need it, for when they're targeting securitization. Um, in terms of what I do is, um, there are issuers that target the securitization market, and they're creating or recreating the wheel each time, and it's inefficient.

[01:04:26] So I offer that ease of knowledge without having the captive capital markets group.

[01:04:33] Rocky Butani: Nice. And, and so, um, uh, how does, how does the investment bank tie in? Or, or what's, what's the process? Let's say someone, uh, comes to you and says, "Hey, I, I wanna explore doing a securitization." They come to you. Uh, how does...

[01:04:46] how do you get an in- investment bank involved? Is that something that you introduce them to and, and make connections?

[01:04:52] Aleksandra Simanovsky | Adige Advisory: Um, that's certainly some of the, um, ways that it works. It really varies, and it really ebbs and flows. So I, when hired, act as an extension of the lender and their capital markets team, which means I partner with all of the investment banks, or I could connect them to the investment banks because of the connections in the industry.

[01:05:11] And, um, I partner with all of their transaction parties in the securitization, whether it's legal, whether it's the diligence providers, whether it's the, um, investment banks or the investors. So it's really the gamut, and it really depends. So just to give you an idea, I just worked on Castle Lake Securitization, and they have a fully fledged out, uh, securitization team because they have done-- they do securitizations every week in all of the asset classes.

[01:05:37] They haven't done one in RTL. So they already have the investment banking relationships. They already have a fully, um, baked out securitization process. But the RTL was a new launch for them. Um, despite that, we were able to partner, and I was able to act with their, um, origination platform and, uh, get to securitization efficiently without them having to go back to the drawing board and figure things out, um, and so on.

[01:06:02] Um, the other, the other gamut of it, I worked with Cardinal, for example. Um, had a tremendous success, uh, with a team that hasn't done a cr- securitization before, and it was their first time, um, doing it, so we partnered a lot closer. So, um, worked on their securitization tapes, worked on their, uh, securitization presentations, worked with their legal team to get them up to speed so that...

[01:06:24] The securitization is very, um, fast-paced, and had they not had kind of a plug-and-play, had I not been part of the process, they would have had to pull a lot of resources from originating the loans, things they're really great at. Um, so I helped make that process a lot more efficient, and we were in and out in, um, six weeks

[01:06:45] Rocky Butani: The companies that, that are involved in securitization, since there's not that many that happen, maybe let's say this year there's might have been maybe 10 or 12, uh, in our space, right?

[01:06:56] Are, are the, uh, um... is it typically the same players that, that are involved in most of the securitizations as far as the legal team, the diligence, um, the investment banks?

[01:07:06] Aleksandra Simanovsky | Adige Advisory: So there's a handful of investment banks, um, that are a mainstay. So, um, the legal-- so maybe there's, uh, five or six that are general players.

[01:07:17] There's always new ones coming in and, uh, because I've worked in the space before RTL, um, have really great relationships irrespective of who it is. Um, and at this point there's a lot of, um, especially in legal, um, a lot of the nuance has already been set up. There's a lot of copy and paste. The documents already exist.

[01:07:36] Um, they just have slightly nuanced differences for each individual transaction. Um, so with that, you know, I don't, I don't see any huge barrier to entry. Um, the benefit of working with a specific investment bank is obviously their, um, ability to sell this type of product. So any new investment bank that comes into the space, um, the consideration is, yes, they have their usual accounts that they sell to, but they need to newly educate them.

[01:08:02] Um, so there are certain names, um, like Performance Trust that has seen the evolution of RTL and their investors know the story. Um, so it's less of an uphill battle to keep them in- interested in the SaaS clause as opposed to, um, somebody like, um, I guess Cantors, a new recent entrant to our space. Um, they are, um, very innovative because they're new to the space, but at the same time, there's an uphill learning curve because of their, um, buyers aren't used to be the same RTL buyers

[01:08:33] Rocky Butani: Okay.

[01:08:33] And, uh, and if,

[01:08:34] let's say there's a lender out there that's, uh, growing, doing a, a ton of volume and they wanna consider doing a securitization, uh, what are, what are the things they need to think about before they even reach out to you? Um, you, you mentioned they have to have a- at least $100 million of loans that they need to pledge to the securitization.

[01:08:54] What, what else do they need to think about and consider and prepare for?

[01:08:58] Aleksandra Simanovsky | Adige Advisory: One of the biggest hurdles, and one of the reasons that a lot of the lenders have had delays in getting to securitization market has been cleanliness of data, uh, because the securitization market has certain requirements of ability to produce that reporting.

[01:09:14] Um, so look, to be honest, I don't think there's any time before reaching out to me. I'm happy to kind of share my knowledge and, uh, get people on the right path because at the end of the day, um, I think the staying power of this industry, of RTL in particular, is the consistency and institutionalization of the individual players.

[01:09:34] So I think the more people could align, the earlier, the better off they are. And to be honest, the 100 million is not a requirement, so I would encourage folks that are doing, you know, $25 million in monthly production to consider it. Because, one, you can get to that $100 million, um, within a short period of time, and that short period of time may be the time you need to align all of the other processes.

[01:09:58] Diligence is important, and that's where data and diligence cross and, uh, that's pretty much, um, key.

[01:10:05] Rocky Butani: And when you say diligence, is that just a, a third-party company that's auditing all the loan files?

[01:10:10] Aleksandra Simanovsky | Adige Advisory: Exactly.

[01:10:11] Rocky Butani: And, and document... Okay. Makes sense. Okay, great. Um, and, uh, and then so as far as the, the types of lenders that you work with, are there any other requirements that you have other than loan volume?

[01:10:24] Aleksandra Simanovsky | Adige Advisory: Uh, no. To be honest, I see RTL or private lending industry as five different, uh, shades of ice cream, right? Um, there is the lenders that are doing less than $5 million. Um, and it's, you know, happy to have conversations there, but there's not much in terms of securitization help I could offer. But giving my connections, happy to make introductions, uh, whether it's, um, diversifying their equity providers, diversifying their, um, warehouse providers.

[01:10:50] Um, so there's really, you know, different gamut. Um, and then there's the bigger, um, securitizers that do this on a frequent basis and, um, you know, somebody who's doing $100 million a month, for example, or a big aggregator. Um, and they could be helped because there's not enough capacity within their teams, um, to get to certain, um, ef- Tasks efficiently, so could be plug and play in that sense.

[01:11:15] Uh, but really the target is, you know, somebody who's doing $25 million a month, um, and upwards to be able to online the processes and, uh, start the conversations, and kind of build it before... build the validation before you need to build the vertical development.

[01:11:32] Rocky Butani: And, and just to clarify, this is all RTL.

[01:11:34] There's, there's no DSCR, uh, lending or, or that's a whole different world of, of securitizations, right?

[01:11:41] Aleksandra Simanovsky | Adige Advisory: It is. It is. Um, and I haven't been involved in it, uh, just because there's been, um, very small profit margin there and, um, um, you know, a lot of the insurance companies are major players in the space, and I know there's a really high, um, focus on the rate environment and hedging, so, and quite different and longer term product obviously.

[01:12:02] Rocky Butani: Okay. All right. Nice. Okay. All right, Alexandra, I think that's all, uh, I had on my list for today. Anything you wanted to add to finish this off?

[01:12:11] Aleksandra Simanovsky | Adige Advisory: No, I think this is tremendous, and look,

[01:12:13] you know, there's a lot of news about the rate environment, um, being volatile and, uh, most recently I think the number came out that the foreclosures are up.

[01:12:23] Um, and I think this is only positive news for the RTL sector because, um, to the extent affordability continues to be constrained, that creates a demand for rental properties. To the extent, um, the foreclosure process is producing more homes that need rehab, that creates opportunity for the buyers and investors, uh, to put capital to work, and there's a ton of capital in this space that's still flighting to this RTL sector away from other longer term assets.

[01:12:52] Um, so even though I do think that there's going to be a pau- pause in issuance in the fourth quarter, I definitely see, um, positive traction, uh, in the future.

[01:13:03] Rocky Butani: Excellent. All right. Glad to end on a good note. And, uh, again, thank you so much for your time and, uh, look forward to seeing you at the next conference.

[01:13:10] Aleksandra Simanovsky | Adige Advisory: My absolute pleasure. Thank you for the opportunity. All right. Thank you, Rock.

[01:13:13] Rocky Butani: And that's a wrap for this episode. Adige Asset Advisory is listed in the services directory of PrivateLenderLink.com. I've put a link to their profile in the description. Reach out to Adige if you have any interest in talking about securitizations, and be sure to mention that you heard about them from Lender Link and the Private Lending Insights podcast.

[01:13:31] If you wanna see a list of all the RTL securitizations that have happened in the last few years, we have a page on our website that lists all of them. Uh, click on Services in the main menu and then look for the Industry Resources section and you'll find a link to the RTL securitizations page. I hope you found this episode to be insightful.

[01:13:51] Thank you for tuning in and listening all the way to the end.