Aeon Investments ceo Oumar Diallo and coo Ben Churchill answer SCI's questions

Q: Aeon recently announced the closing of its first commercial real estate CLO warehouse (SCI 12 October) with Credit Suisse. Could you provide some background to the decision to become a CRE CLO issuer?
OD: We’re active across the real estate spectrum and seek relative value opportunities in the UK and Europe.

The European CRE CLO market has been stagnant post-financial crisis. But the pandemic created opportunities, including in the office sector, for example. With less competition in the space, it has enabled us to stand out, thanks to our robust underwriting processes.

We focus on mid-market loans, so CRE CLO vehicles make more sense than CMBS for us to term out our investments.

BC: Cost of capital was an additional driver on why we focused on a CRE CLO platform. Our cost of funding is significantly cheaper than many of our peers, so we are not constrained by target returns. This allows us to focus on less competitive areas of the market, unlocking the relative value.

Q: Aeon envisages launching three CRE CLOs over the next two to three years. What gives you confidence that investor appetite exists for such product?
BC: We’re confident that there will be demand for CRE CLOs, subject to the prevailing market conditions. There is investor appetite across our book for this risk and our portfolio is generally of a higher quality than recent comparable transactions which have priced well.

We’re continuing to underwrite CRE assets, with a portfolio target of £375m. We project that we need a critical mass of around £220m to issue, which we should reach in February. However, we have flexibility in terms of the investment period and there is no pressure to issue from our stakeholders, so we can wait for the optimal time to issue.

OD: We’re targeting 1Q23 for our first CRE CLO, which will be sterling-denominated and backed by assets domiciled in England and Wales. We anticipate exploring an additional core Europe facility sometime next year, which would be secured by assets domiciled in France, Germany, Ireland and the Netherlands.

Q: CRE loans will be screened using Aeon’s proprietary ESG methodology. What does this entail?
OD: Our underwriting approach incorporates an ESG screening methodology, which includes 16 KPIs. For example, on the green side, we take into account the degree of flood risk and energy efficiency of a property; on the social side, we consider whether a property offers amenities, such as provisions for cycling to work.

Each factor is assigned a rating and the aim is to end up with a global score between a range of zero (representing the best asset) and five (representing the worst asset). The current score across our portfolio is 3.5, with a score of 1.8 for our strongest asset and a score of three for the weakest asset.

Q: How do you expect the European CRE market to evolve going forward?
OD: Banks are currently retrenching for a number of reasons, including cost and lack of resources. In the CRE space, it’s generally for the latter reason.

We operate in the mid-market segment, which requires manual underwriting because the loans typically are too large and bespoke to use AI-driven underwriting systems. This trend is likely to continue, whereby banks will focus on loans sized at £20m-£40m and above. Consequently, we believe we can add value with tailored loans and financing solutions of between £2m and £20m, with LTV ratios of up to 75% for acquisitions, refinancings and asset upgrades.

BC: The structured credit sector is generally depressed at present, but the floating-rate nature of CRE means that such assets are a natural hedge against rising interest rates and inflation. The weighted average LTV of our portfolio stands at around 58%. Our conservative underwriting process means that even given current concerns, the portfolio remains well protected, with significant headroom.

Corinne Smith