Rothesay hunts for more complexity, scale to grow US lending footprint

CIO Rob Allard says infra and energy rank high alongside CRE debt priorities as issuers enter a more fractured environment.

Rothesay is looking for more creative lending opportunities and financing avenues to tackle investor demand because of challenges in the commercial mortgage-backed securities and single-asset, single-borrower markets.

Rob Allard, CIO and head of Rothesay Asset Management North America at the $72 billion London-based pensions insurance specialist, said the firm is also targeting more scale and complex lending opportunities following a range of deals in the US commercial real estate sector, including marquis tenants in hospitality and leisure.

For its scaling plans, the parent company in particular is looking to grow by acquiring more bulk annuities in the UK. In the US, Allard said the stateside unit is moving into a new office in the fall of 2022 – a space three times the size of Rothesay’s current US office – and plans to add more personnel and assets to scale up further.

“The expected macroeconomic environment over the next six to 12 months has the potential to present attractive investment opportunities for long-term investors like Rothesay,” Allard said. “But through a market where we expect to see moments of significant volatility, we will be very disciplined and focused around the trades we want to do and the people we want to work with.”

After a quiet 2021 brought on by less attractive pandemic market opportunities, Allard said Rothesay is finding new means of sustaining momentum amid the dislocation. The firm has carved out $1.3 billion of new US business since the start of 2022.

“Given dislocations in credit, specifically in CMBS and SASB, we have seen increased interest in different solutions for financing because issuers are uncertain at what spread they can issue or if they can issue at all,” Allard said.

Rothesay is anticipating the remainder of 2022 to be as volatile as it has been in recent months, most notably because of sustained inflation and persistent interest rate hikes.

Allard said the confluence of macro events are interplaying with the market in different ways. “On one level, the marginal ABS buyer is more constrained right now, making execution in ABS markets more challenging. When that real money marginal buyer goes away, the next marginal buyers are typically hedge funds and levered money. Therefore, execution in these markets has become more expensive, creating some uncertainty for particular types of assets. Within this context, we benefit from having an established track record of providing certainty of execution throughout the cycle.”

The firm has seen the same pressure affect CMBS and SASB deals. Allard said from a sponsor’s perspective, many financings are no longer accretive because of where cap rates and interest rates are now.

“It is a real question mark from a sponsor’s perspective,” Allard said. “They may want to explore their options for refinancing or solve for better rates by reducing leverage to a more neutral cap rate level.”

The pressure culminates in uncertainty and further dislocation in a market simply trying to rebound from prior pandemic volatility.

“For long-term investors like us, short-term uncertainty in markets can be a good thing,” Allard said, “because borrowers may be more willing to discuss financing solutions that provide better terms, rates or duration than they would find in traditional lending environments, whether that is ABS or the bank market.”

With banks less willing to commit to balance sheet lending as well, Allard said Rothesay is taking a more measured approach, because while the firm is not seeing any obvious signs of distress, there is clearly dysfunction in the lending landscape.

Outside of its traditional real estate exposure, Rothesay is growing its real asset focus to also look toward infrastructure and energy opportunities. Allard said the firm recently added more professionals covering both sectors to look at toll roads, renewable energy and other areas to further the manager’s strategy of being a global relative value investor.