Mezzanine financing or how to stretch your funding further?

Posted by Krios Capital Partners on 19th December 2019 -

As a result of the Brexit uncertainty and resulting property market volatility, some senior lenders have scaled down their lending appetite by reducing their LTV across the board. 

In short, more skin in the game or equity are required on day 1.

Against that backdrop, mezzanine finance has emerged as a handy financial solution to plug the financing gap. 

What is mezzanine finance? 

Junior, subordinated debt or second charge loan sitting behind the senior loan in terms of priority of repayment. 

Mezzanine capital is often a more expensive financing source for a borrower than senior debt.

The higher cost of capital associated with mezzanine financing is the result of it being a subordinated (or junior) obligation in a company's capital structure (i.e. in the event of default the mezzanine financing is only repaid after all senior obligations have been satisfied).

When can you use mezzanine finance? 

Bridging loan: when buying or refinancing a property, a second charge loan can be arranged to enhance the LTV and, therefore, release more capital. Depending on the asset class (residential, etc.), the total gearing (incl. senior debt & mezzanine) can be go up to 75% of the value of the property.

Development finance: with most lenders at 65% LTGDV (on average), mezzanine finance can be used to top-up the senior debt funding. As an example, for a ground-up development, the maximum gearing can reach up to 75% LTGDV (capped at 90% LTC) meaning the client will have to inject only 10% of the costs as equity.

Legal documentation

As for a senior loan, a legal mortgage deed and a debenture are required.

Additionally, a deed of priority or intercreditor agreement would need to be agreed and executed by both the senior and mezzanine lender.

How can we help?

At Krios Capital Partners, we have the expertise to design and structure first and second charge bridging finance and development finance loans.

We have access to property finance lenders that can provide both the senior and junior debt as a one-stop-shop solution.

If you would like to speak to us about a bridging or development finance requirement, please contact us at [email protected] or, alternatively, click on the button below.