Beginning in mid-March, the COVID-19 pandemic led to sharp dislocations in credit markets, which created significant buying opportunities in the Freddie Mac K-Series sector, an area of investment expertise for Spire’s long-term US investment partner Bridge Investment Group. The Spire Bridge 2020 K Series Co-Investment Fund (USD) invested opportunistically alongside the Bridge Debt Fund III and a leading sovereign wealth fund in a portfolio of US$512 million of seasoned Freddie Mac Second Loss bonds and B-Pieces from forced sellers, which included:

• Second Loss “BBB equivalent” bonds purchased at a weighted average yield of ~8%, a notable spread over the 4% yield range they traded at just two months prior. With significant protection in the capital structure due to subordination of 7.5%, we felt these yields were driven by sudden illiquidity and not credit quality. Since purchasing these bonds two weeks ago, we’ve observed a significant drop-off in selling as capital markets stabilized and forced sellers depleted their inventories. The current trading levels on these bonds compressed ~200 bps to the ~6% yield range, and we anticipate further compression could occur.
• B-piece portfolio acquired at a very favorable 13.4% weighted-average yield. New issue B-pieces, which do not have the benefit of “seasoning”, sold at around an 8% yield as recently as February. Our seasoned B-pieces are 2013-2017 vintage, the underlying loans have amortized, and the properties have appreciated in value since origination. With these characteristics, we believe the risk associated with these B-pieces is well-mitigated. The active selling of B-pieces has also subsided since the initial burst of forced selling two weeks ago, with recent trades on seasoned B-pieces now occurring at yields below 11%.

SPIRE CAPITAL (SPIRE) has a long-standing partnership with Bridge Investment Group (Bridge), including the outstanding Bridge Debt Strategies (BDS) team headed by CIO Jim Chung. Bridge Debt Strategies have been the largest buyer (US$3b) of the Freddie Mac K-Series in the United States over the previous few years. With global yield compression since Q2-19, this has resulted in the BDS team standing on the sidelines. However, due to the current dislocation across the securities market, this has now presented an attractive opportunity for BDS to take advantage of.

Below is a note from Jim Chung received on 28 March 2020, including a very opportunistic investment that SPIRE are co-investing in alongside Bridge Debt Fund III:

“This week we saw significant dislocation in the securities market, particularly related to over leverage and margin calls on certain mortgage REIT and other market participants, and a rush to sell securities.  Forced sellers sold what they could, and high quality, seasoned K-Series first and second loss tranches were offered at yields not seen in over 7 years. These securities were generally seasoned bonds, with low and declining LTVs and high debt yields.  

Bridge moved quickly to take advantage of this activity, and over the course of the week acquired US$512mm K Series B piece and second loss portfolio at a weighted average unlevered yield of ~10% and current pay of ~4%. We believe this is extremely attractive entry pricing for historically safe investments and are very happy with the portfolio we’ve constructed. We believe that this temporary window of market distress will narrow as the market normalizes going forward. In fact, we have already received inquiry to acquire some of our positions at prices higher than our entry levels.”

More information about the Spire Bridge 2020 K Series Co-Investment Fund (USD) available here