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Mezzanine Finance by Dominic Reilly (JLL)

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The document discusses mezzanine finance, which provides financing that ranks between senior debt and equity. Mezzanine finance is used when project owners need additional funds but cannot use all equity, or when using mezzanine will enhance returns. It is typically more expensive than senior debt but less risky than equity. Mezzanine financiers are motivated by enhanced returns over senior debt and participation in asset management gains. Their position is secured like debt through charges and guarantees or like equity through loan stock and preferred shares. The future of mezzanine finance is growing with more providers but it remains an expensive option only suited to some projects.

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Mezzanine Finance Dominic Reilly Director, Jones Lang LaSalle Finance 17 November 2011
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 financiers position secured? Typical providers Typical cash flow What is the prognosis/future for mezzanine finance? 2
What is Mezzanine Finance? Expensive Cheap Debt or Equity 3
What is Mezzanine Finance? 100% 80% EQUITY Total Return 15% - 25% p.a. Cost of Funds 65% MEZZANINE plus 7.5% - 12.5% p.a. RISK RETURN Cost of Funds SENIOR DEBT plus 2.0% - 3.0% p.a. 4
In what circumstances is Mezzanine Finance used? Where the owner wishes to Where the use of Where the owner has share risk with a financing mezzanine will enhance the insufficient funds/equity partner return on invested equity 5
What motivates a Financier to provide Mezzanine? Enhanced Participation Lower risk Backing a returns over in asset than outright specialist real and above management ownership estate owner Senior Debt gains 6
How is it priced? Arrangement Interest payment Exit fees fees or coupon 7
How is the financiers position secured? As debt would be secured As Equity i.e. Charges and Guarantees i.e. Loan stock and preferred shares 8
Typical providers 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 9
Typical Cash Flow PURCHASE PRICE Net Initial Rent 贈750,000 per annum PURCHASE PRICE 贈10,000,000 Net Initial Yield 7.09% FINANCING SUMMARY INDEPENDENT OPEN MARKET VALUE 贈10,000,000 SENIOR DEBT 贈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 贈2,000,000 Loan to Value Ratio 80.0% Income to Interest Cover 1.68 times Arrangement Fee 3.0% 贈60,000 5 Year Swap Rate 1.85% Margin 8.15% Interest Charge 10.00% per annum Exit Fee 3.00% 贈60,000 10
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 贈750,000 贈750,000 贈750,000 贈750,000 贈750,000 贈3,750,000 Capital Value 贈10,000,000 贈10,000,000 贈10,000,000 贈10,000,000 贈10,000,000 贈10,000,000 Investment Yield 7.09% 7.09% 7.09% 7.09% 7.09% SENIOR DEBT Brought Forward 贈6,000,000 贈5,940,000 贈5,880,000 贈5,820,000 贈5,760,000 贈5,700,000 Interest -贈246,000 -贈243,540 -贈241,080 -贈238,620 -贈236,160 (贈1,205,400) Repayments -贈60,000 -贈60,000 -贈60,000 -贈60,000 -贈60,000 (贈300,000) Carried Forward 贈5,940,000 贈5,880,000 贈5,820,000 贈5,760,000 贈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 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 Interest Paid -贈200,000 -贈200,000 -贈200,000 -贈200,000 -贈200,000 (贈1,000,000) Carried Forward 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 贈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 贈200,000 贈200,000 贈200,000 贈200,000 贈200,000 贈1,000,000 Fees 60,000 60,000 贈120,000 Repay Mezzanine 2,000,000 贈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 贈244,000 贈246,460 贈248,920 贈251,380 贈253,840 贈1,244,600 11
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 12
Thank you COPYRIGHT 息 JONES LANG LASALLE IP, INC. 2011

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Mezzanine Finance by Dominic Reilly (JLL)

  • 1. Mezzanine Finance Dominic Reilly Director, Jones Lang LaSalle Finance 17 November 2011
  • 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 financiers position secured? Typical providers Typical cash flow What is the prognosis/future for mezzanine finance? 2
  • 3. What is Mezzanine Finance? Expensive Cheap Debt or Equity 3
  • 4. What is Mezzanine Finance? 100% 80% EQUITY Total Return 15% - 25% p.a. Cost of Funds 65% MEZZANINE plus 7.5% - 12.5% p.a. RISK RETURN Cost of Funds SENIOR DEBT plus 2.0% - 3.0% p.a. 4
  • 5. In what circumstances is Mezzanine Finance used? Where the owner wishes to Where the use of Where the owner has share risk with a financing mezzanine will enhance the insufficient funds/equity partner return on invested equity 5
  • 6. What motivates a Financier to provide Mezzanine? Enhanced Participation Lower risk Backing a returns over in asset than outright specialist real and above management ownership estate owner Senior Debt gains 6
  • 7. How is it priced? Arrangement Interest payment Exit fees fees or coupon 7
  • 8. How is the financiers position secured? As debt would be secured As Equity i.e. Charges and Guarantees i.e. Loan stock and preferred shares 8
  • 9. Typical providers 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 9
  • 10. Typical Cash Flow PURCHASE PRICE Net Initial Rent 贈750,000 per annum PURCHASE PRICE 贈10,000,000 Net Initial Yield 7.09% FINANCING SUMMARY INDEPENDENT OPEN MARKET VALUE 贈10,000,000 SENIOR DEBT 贈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 贈2,000,000 Loan to Value Ratio 80.0% Income to Interest Cover 1.68 times Arrangement Fee 3.0% 贈60,000 5 Year Swap Rate 1.85% Margin 8.15% Interest Charge 10.00% per annum Exit Fee 3.00% 贈60,000 10
  • 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 贈750,000 贈750,000 贈750,000 贈750,000 贈750,000 贈3,750,000 Capital Value 贈10,000,000 贈10,000,000 贈10,000,000 贈10,000,000 贈10,000,000 贈10,000,000 Investment Yield 7.09% 7.09% 7.09% 7.09% 7.09% SENIOR DEBT Brought Forward 贈6,000,000 贈5,940,000 贈5,880,000 贈5,820,000 贈5,760,000 贈5,700,000 Interest -贈246,000 -贈243,540 -贈241,080 -贈238,620 -贈236,160 (贈1,205,400) Repayments -贈60,000 -贈60,000 -贈60,000 -贈60,000 -贈60,000 (贈300,000) Carried Forward 贈5,940,000 贈5,880,000 贈5,820,000 贈5,760,000 贈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 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 Interest Paid -贈200,000 -贈200,000 -贈200,000 -贈200,000 -贈200,000 (贈1,000,000) Carried Forward 贈2,000,000 贈2,000,000 贈2,000,000 贈2,000,000 贈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 贈200,000 贈200,000 贈200,000 贈200,000 贈200,000 贈1,000,000 Fees 60,000 60,000 贈120,000 Repay Mezzanine 2,000,000 贈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 贈244,000 贈246,460 贈248,920 贈251,380 贈253,840 贈1,244,600 11
  • 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 12
  • 13. Thank you COPYRIGHT 息 JONES LANG LASALLE IP, INC. 2011