Hailey Hye-In Jin, Senior Attorney at Dentons Lee, contributed a column to Dealbook News in March 2025, offering insights into mezzanine investment recovery strategies.

The article outlines key approaches that mezzanine investors should consider before a default occurs—such as secondary market sales, refinancing, and senior loan takeovers—and provides a detailed case study of Daol Asset Management’s Union Station project.

What makes this column particularly insightful is that Jinhyein was directly involved in the execution of the recovery strategy for this project. Drawing from her hands-on advisory experience during the decision-making process for additional investment and senior loan acquisition, she presents a grounded and practical perspective that goes beyond theoretical discussion.

This contribution offers valuable takeaways for investors and practitioners interested in managing the risks and structuring effective recovery strategies for mezzanine investments.

Source in Korean: Mezzanine Investment Recovery Strategies and the Union Station Case 

Deal Book News is a market intelligence media platform for project finance and alternative investment professionals. It is a subscriber-only newsletter that provides trends and insights related to project finance (PF), development finance, and investment finance (IB) in the domestic and international real estate, infrastructure, and energy industries.

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Mezzanine Investments in the U.S.: A Reflection

1. Overview of Mezzanine Investments

Mezzanine investments are financial instruments positioned between senior debt and equity investments. They typically take the form of secured subordinated loans or convertible debt. These investments offer high returns but come with higher risks. Mezzanine loans often fill gaps in the Loan-to-Value ("LTV") ratio that senior loans do not cover, offering higher interest rates. However, mezzanine loans require careful structuring, as they are the first to absorb losses if collateral values decline. Unlike typical junior mortgages, U.S. mezzanine investments generally include rights that help secure the borrower's position. Failing to exercise these rights can hinder recovery during the collateral enforcement process.

2. Key Risks of Mezz Investments

• Mezzanine investments entail several risks that must be carefully considered for successful recovery.
• Borrower Position Securing: Investors must ensure they have the ability to secure the borrower's position in certain scenarios; otherwise, the likelihood of recovery through collateral enforcement decreases.
• LTV Limitations: Since mezzanine loans are positioned where conventional LTV levels make lending challenging, they are vulnerable to volatility due to high leverage.
• Refinancing Possibility: Analyzing whether the borrower can refinance the mezzanine loan is crucial. Failure to refinance could result in significant losses.
• Multi-Stage Investment Strategies: When mezzanine investments span multiple stages, lower-tier investors may need to acquire additional stakes in higher-tier investments, requiring a well-defined funding plan.
• Possibility of Additional Capital Injections: In the U.S., general partners and limited partners tend to favor the capital call method within blind fund structures to facilitate timely fund withdrawals. In contrast, the project-based investment approach in South Korea makes additional capital injections more difficult, posing a potential risk.
• Market Conditions and Interest Rate Volatility: Rising interest rates increase the cost of obtaining mezzanine loans, raising the borrower's interest burden and default risk.

3. Recovery Strategies in the Mezz Market

Before a default situation arises, mezzanine investors should consider the following strategies:

• Secondary Market Sale: Early unwinding of mezzanine positions can help minimize losses.
• Refinancing: Adjusting existing loans can reduce the borrower's financial burden and enhance the investor's recovery potential.
• Acquiring Senior Loans: By securing senior loans, mezzanine investors can strengthen their control over collateral, ultimately gaining control of the project.

These strategies are essential for managing the unique characteristics and risks of mezzanine investments, ensuring a higher chance of recovery.

4. Successful Mezz Investment Recovery Case: Union Station

A notable example of a successful mezzanine investment recovery is Daol Asset Management's Union Station project. Despite facing default, active strategies led to successful recovery.

In 2018, Daol Asset Management invested $100 million in subordinated loans secured by usage rights at Union Station, partnering with local manager Rexmark. However, the COVID-19 pandemic halted train station operations, leading to the closure of shops inside and an event of default ("EOD") in early 2021. Wells Fargo, the senior collateral holder, enforced its rights, risking a total loss of Daol's investment.

In January 2022, Daol injected an additional $100 million to prepay the senior loan and executed the collateral in March, becoming the owner of Union Station. Legal disputes arose when Amtrak claimed eminent domain in March 2022, resulting in five lawsuits. A settlement was reached, agreeing to pay $505 million, successfully recovering the investment.

This case highlights the importance of actively acquiring senior loans to control projects when necessary, going beyond the role of a mere lender.

5. Conclusion and Implications

While mezzanine investments carry high risks, a well-formulated strategy can yield significant returns.

For successful mezzanine investments, it is essential to:

• Set conservative LTVs initially.
• Thoroughly review the borrower's financial health and refinancing potential.
• Design investment structures with flexibility to respond to unforeseen financial changes.
• Plan various recovery strategies (e.g., secondary market sales, refinancing, senior loan acquisition).

Overseas mezzanine investments often use blind fund structures to form multiple portfolios, with capital calls made as needed.

Final Thoughts

This article provides a comprehensive overview of U.S. mezzanine investments, covering key elements necessary for investors to effectively manage these investments and mitigate potential risks. By following the outlined strategies, investors can navigate the complexities of mezzanine investments and enhance their chances of achieving successful outcomes.