Business Context and Reporting Period
Company: TPG RE Finance Trust, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: November 29, 2018
Event: Entry into a Material Definitive Agreement regarding the closing of a Collateralized Loan Obligation (CLO) transaction named "TRTX 2018-FL2" (the "FL2 CLO").
Key Financial Metrics and Transaction Details
The Company, through wholly-owned subsidiaries, issued a total of approximately $862.6 million in notes and preferred shares to fund the acquisition of commercial real estate assets.
| Note Class | Principal Amount | Rating (KBRA) | Interest Rate (LIBOR +) | Expected Weighted Avg Life |
|---|---|---|---|---|
| Class A | $505,084,000 | AAA(sf) | 1.13% | 3.13 years |
| Class A-S | $85,015,000 | AAA(sf) | 1.45% | 3.88 years |
| Class B | $62,510,000 | AA-(sf) | 1.65% | 3.96 years |
| Class C | $66,261,000 | A-(sf) | 2.30% | 4.00 years |
| Class D | $76,263,000 | BBB-(sf) | 2.70% | 4.16 years |
| Class E (Retained) | $48,758,000 | BB-(sf) | 4.00% | 4.26 years |
| Class F (Retained) | $28,755,000 | B-(sf) | 5.00% | 4.38 years |
| Total Notes | $872,646,000 | - | - | - |
Preferred Shares: Issued to a wholly-owned subsidiary (FL2 Retention Holder) to comply with risk retention rules. Aggregate liquidation preference equals $1,000 per share. No stated dividend rate; dividends are non-cumulative and paid only if funds are available.
Collateral: Proceeds were used to purchase two commercial real estate whole loans and 23 fully-funded pari passu participations (the "FL2 Initial Mortgage Assets").
Aggregate Principal Balance of Assets: Approximately $1.0 billion as of October 31, 2018.
Portfolio Impact: Represents approximately 23.9% of the Company's loan investment portfolio as of September 30, 2018.
Material Changes and Use of Proceeds
The transaction significantly altered the Company's capital structure and liquidity position:
- Debt Repayment: Proceeds were used to repay $621.8 million of borrowings under the Company's secured revolving repurchase facilities with Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.
- Liquidity Creation: Repaying the repurchase facilities created additional borrowing capacity for new loan originations.
- Asset Acquisition: The Company effectively securitized a portion of its portfolio, transferring approximately $1.0 billion in assets to the FL2 Issuer in exchange for the issued notes and preferred shares.
- Transaction Expenses: A portion of proceeds was used to pay transaction costs.
Outlook, Management Commentary, and Risks
Reinvestment Period: The FL2 CLO includes a 24-month reinvestment period during which the Manager may reinvest proceeds from the mortgage assets into additional eligible assets.
Management Fees: The external manager (TPG RE Finance Trust Management, L.P.) is entitled to a collateral management fee of 0.1% per annum of the net outstanding balance of the FL2 Mortgage Assets. However, the Manager has agreed to waive this fee for as long as it (or an affiliate) serves as both the FL2 Collateral Manager and the Company's external manager.
Risks and Contingencies:
- Subordination: Payments on junior notes (Classes C, D, E, F) and preferred shares are subordinate to senior notes. Interest on junior classes may be deferred if funds are insufficient, without constituting an event of default.
- Note Protection Tests: The transaction is subject to a Par Value Test (threshold 124.79%) and an Interest Coverage Test (threshold 120.00%). Failure to meet these tests requires cash flows to be redirected to pay down senior notes rather than paying interest on junior notes or preferred shares.
- Repurchase Obligations: The FL2 Seller (a subsidiary of the Company) must repurchase assets or make cash payments if material breaches of representations and warranties are discovered. This obligation is guaranteed by TPG RE Finance Trust Holdco, LLC.
- Modeling Assumptions: The stated weighted average lives assume no prepayments, no maturity extensions, and no capitalized interest, which may not occur in practice.
Key Facts for Investor Verification
- Verify the current status of the $621.8 million repurchase facility repayment and the resulting available borrowing capacity.
- Monitor the FL2 Note Protection Tests (Par Value and Interest Coverage) to assess the risk of interest deferrals on retained junior notes and preferred shares.
- Confirm the performance of the $1.0 billion FL2 Initial Mortgage Assets, which represent a significant portion (23.9%) of the Company's total portfolio.
- Review the terms of the risk retention (Class E, Class F, and Preferred Shares) held by the Company's subsidiary to understand the residual risk exposure.
- Assess the impact of the 24-month reinvestment period on the composition and risk profile of the collateral pool.