Date post: | 13-May-2015 |
Category: |
Economy & Finance |
Upload: | missfaa |
View: | 1,416 times |
Download: | 2 times |
Mezzanine
Dominic Reilly
Director, Jones Lang LaSalle Finance
17 November 2011
Finance
2
Contents
• What is mezzanine finance?
• In what circumstances is mezzanine finance used?
• What motivates a financier to provide mezzanine?
• How is mezzanine finance priced?
• How is the financier’s position secured?
• Typical providers
• Typical cash flow
• What is the prognosis/future for mezzanine finance?
3
What is Mezzanine Finance?
Expensive Debt
Cheap Equity or
4
What is Mezzanine Finance?
100%
65%
RISK RETURN
Total Return 15% - 25% p.a.
Cost of Funds
plus 7.5% - 12.5% p.a.
Cost of Funds
plus 2.0% - 3.0% p.a.
EQUITY
MEZZANINE
SENIOR DEBT
80%
5
In what circumstances is Mezzanine Finance used?
Where the owner has insufficient funds/equity
Where the owner wishes to share risk with a financing
partner
Where the use of mezzanine will enhance the
return on invested equity
6
What motivates a Financier to provide Mezzanine?
Enhanced returns over and above
Senior Debt
Lower risk than outright ownership
Participation in asset
management gains
Backing a specialist real estate owner
7
How is it priced?
Arrangement fees
Interest payment or coupon
Exit fees
8
How is the financier’s position secured?
As debt would be secured
• i.e. Charges and Guarantees
As Equity
• i.e. Loan stock and preferred shares
Typical providers
9
• Duet Private Equity Ltd
• Ekistics Property Advisors LLP
• Investec
• LaSalle Investment Management
• Longbow Real Estate Capital
• M & G Investments
• Maslow Capital
• Matrix
• Pacific Real Estate Capital Partners
• Pluto Capital
• Pramerica
• Queen Anne Street Capital
• QIB (Qatar Islamic Bank)
• RBS
10
Typical Cash Flow
PURCHASE PRICE
Net Initial Rent £750,000 per annum
PURCHASE PRICE £10,000,000
Net Initial Yield 7.09%
FINANCING SUMMARY
INDEPENDENT OPEN MARKET VALUE £10,000,000
SENIOR DEBT £6,000,000
Loan to Value Ratio 60.0%
Income to Interest Cover 3.05 times
5 Year Swap Rate 1.85%
Margin 2.25%
Interest Charge 4.10%
MEZZANINE FINANCE £2,000,000
Loan to Value Ratio 80.0%
Income to Interest Cover 1.68 times
Arrangement Fee 3.0% £60,000
5 Year Swap Rate 1.85%
Margin 8.15%
Interest Charge 10.00% per annum
Exit Fee 3.00% £60,000
11
Typical Cash Flow Year
Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16
1 2 3 4 5 Totals
Rental Income
Rental Income £750,000 £750,000 £750,000 £750,000 £750,000 £3,750,000
Capital Value £10,000,000 £10,000,000 £10,000,000 £10,000,000 £10,000,000 £10,000,000
Investment Yield 7.09% 7.09% 7.09% 7.09% 7.09%
SENIOR DEBT
Brought Forward £6,000,000 £5,940,000 £5,880,000 £5,820,000 £5,760,000 £5,700,000
Interest -£246,000 -£243,540 -£241,080 -£238,620 -£236,160 (£1,205,400)
Repayments -£60,000 -£60,000 -£60,000 -£60,000 -£60,000 (£300,000)
Carried Forward £5,940,000 £5,880,000 £5,820,000 £5,760,000 £5,700,000
Income To Interest Cover 3.05 3.08 3.11 3.14 3.18
Loan to Value Ratio 60.0% 59.4% 58.8% 58.2% 57.6% 57.0%
MEZZANINE FINANCE
Brought Forward £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000
Interest Paid -£200,000 -£200,000 -£200,000 -£200,000 -£200,000 (£1,000,000)
Carried Forward £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000
Income To Interest Cover 1.68 1.69 1.70 1.71 1.72
Loan to Value Ratio 80.0% 79.4% 78.8% 78.2% 77.6% 77.0%
MEZZANINE CASH FLOW
Mezzanine Invested -2,000,000
Interest £200,000 £200,000 £200,000 £200,000 £200,000 £1,000,000
Fees 60,000 60,000 £120,000
Repay Mezzanine 2,000,000 £0
Cash Flow -1,740,000 200,000 200,000 200,000 200,000 2,060,000
Internal Rate of Return 12.6%
Surplus Rent after Debt Service £244,000 £246,460 £248,920 £251,380 £253,840 £1,244,600
12
What is the prognosis/future for mezzanine finance?
Growing appetite from greater number of providers
New entrants to the market gaining an exposure to the UK Real Estate Market
Many are seeking to plug the gap between loans due for repayment and the amount
available today by way of Senior Debt
But…
• An expensive source of finance only suited to some projects
• For some borrowers, there are few alternatives, therefore eroding their returns
• Current providers could extend their activities to providing senior debt thereby increasing the capital needed to
repay an over-borrowed and over-lent market
Thank you
COPYRIGHT © JONES LANG LASALLE IP, INC. 2011