Business Context and Reporting Period
Company: Colony Credit Real Estate, Inc. (CLNC)
Filing Type: Form 8-K (Current Report)
Date of Report: October 22, 2019
Event: Entry into a Material Definitive Agreement regarding a Collateralized Loan Obligation (CLO) transaction.
On October 22, 2019, the Company, through its subsidiary CLNC Mortgage Sub-REIT, LLC, entered into a CLO transaction. The transaction involves the issuance of various classes of notes and preferred shares by newly formed Cayman Islands and Delaware entities (the "CLO Issuers") to fund the acquisition of a portfolio of commercial real estate collateral interests.
Key Financial Metrics and Transaction Structure
The CLO Issuers issued a total of eight classes of notes and preferred shares. The aggregate principal or notional amount of the securities issued is approximately $1,006.5 million.
| Security Class | Principal/Notional Amount | % of Total | Ratings (Moody's / DBRS) | Initial W.A. Life |
|---|---|---|---|---|
| Class A Notes | $528,409,000 | 52.50% | Aaa(sf) / AAA(sf) | 3.35 years |
| Class A-S Notes | $100,650,000 | 10.00% | NR / AAA(sf) | 4.04 years |
| Class B Notes | $60,390,000 | 6.00% | NR / AA(low)(sf) | 4.20 years |
| Class C Notes | $70,454,000 | 7.00% | NR / A(low)(sf) | 4.33 years |
| Class D Notes | $65,422,000 | 6.50% | NR / BBB(sf) | 4.49 years |
| Class E Notes | $15,098,000 | 1.50% | NR / BBB(low)(sf) | 4.49 years |
| Class F Notes | $50,325,000 | 5.00% | NR / BB(low)(sf) | 4.62 years |
| Class G Notes | $32,711,000 | 3.25% | NR / B(low)(sf) | 4.68 years |
| Preferred Shares | $83,035,969 | 8.25% | NR / NR | N/A |
Use of Proceeds: Proceeds were used to purchase an initial portfolio of collateral interests, repay pre-closing financings owed by the seller, and cover transaction fees and expenses.
Collateral Manager: CLNC Advisors, LLC (a subsidiary of the Company) serves as the Collateral Manager and has agreed to waive its management fee for the duration of its tenure.
Maturity: The Notes mature in August 2035 unless redeemed or repaid earlier.
Reinvestment Period: 24 months.
Material Changes and Transaction Details
This filing represents a significant capital market event rather than a change in operating performance. Key structural details include:
- Self-Holding: CLNC 2019-FL1 DRE, LLC (an indirect subsidiary of the Company) acquired 100% of the Class F Notes, Class G Notes, and the Preferred Shares.
- Recourse: The Offered Notes (Classes A through E) are limited recourse obligations of the Issuer and non-recourse obligations of the Co-Issuer, payable solely from collateral interests. The Class F and G Notes are not secured.
- Interest Rates: Rates are generally based on LIBOR (or a replacement benchmark) plus a spread. Spreads range from 1.25% (Class A) to 6.20% (Class G) initially, with step-ups applicable after specific dates (e.g., July 2025 or October 2021).
- Exchangeability: Class F and G Notes may be exchanged for MASCOT Notes (Principal & Interest and Interest Only tranches).
Guidance, Risks, and Contingencies
Management Commentary: The Company issued a press release on October 22, 2019, announcing the closing of the CLO. The transaction is designed to provide liquidity and funding for the Company's commercial real estate bridge loan financing business.
Risks and Contingencies:
- Taxable Mortgage Pool (TMP): The Issuer is a TMP. While expected to be treated as a qualified REIT subsidiary, "excess inclusion income" (EII) may arise. The Company intends to pay corporate income tax on EII rather than distribute it to stockholders, though uncertainties in EII computation exist.
- Note Protection Tests: The Notes are subject to minimum Par Value (117.37%) and Interest Coverage (120.00%) ratios. Failure to meet these tests triggers mandatory redemption of Offered Notes.
- Collateral Defects: The Seller (CLNC 2019-FL1 Funding, LLC) must cure material breaches of representations or repurchase collateral interests if defects are discovered within 90 days.
- Liquidity Restrictions: To maintain REIT subsidiary status, the Issuer must remain wholly-owned by the Sub-REIT, restricting the transfer of certain Notes and equity.
Investor Verification Checklist
- Verify the composition and credit quality of the initial collateral portfolio purchased with the proceeds.
- Confirm the Company's ability to maintain the required Note Protection Tests (Par Value and Interest Coverage ratios).
- Review the tax implications of the "excess inclusion income" (EII) and the Company's strategy for paying associated corporate taxes.
- Monitor the 24-month reinvestment period and the Company's ability to acquire new collateral meeting the CLO's investment criteria.
- Assess the impact of the Company retaining the junior tranches (Class F, Class G, and Preferred Shares) on its balance sheet and risk exposure.