99% LTV With Mezz Financing?
I am curious to know. I hear its possible to get 99% financing with a mix of senior and junior debt. So lets say a senior lender provides 80% of the value at 6% and Mezz guy provides 19% of the value at say 11%. The equity holder would still stand to return a very nice IRR. Do I have this right or is there more to this? I have been reading up Mezz and its pretty interesting. Any of you guys here of this scenario happening?
Not realistic (I'm talking about an LBO scenario). No Mezz lender is going to want any part of a deal where there's that small an equity cushion. The risk of default is too great and the lack of skin in the game doesn't really give the equity holders a huge incentive to see the investment succeed. If you're thinking of mezz as equity, having other coinvestors, etc., sure you can reduce the equity you need to put in as a sponsor. But realistically, even with mezz, you're probably going to get closer to equity being 30-60% of the total in a typical LBO.
In an M&A deal, sure, it's fairly common to see it being 100% debt financed.
You can talk people into anything bro. Make it rain.
Are you talking stand-alone assets or a portfolio of assets? I do not do REPE but that cap stack sounds pretty aggressive even in the 2006 days. Interested to hear from others.
Standalone asset. For example, an office building or an apartment.
Generally that would be Mall, Office for informational purposes.
It would obviously be very dependent on the collateral and just as dependent on the structure of the mezz. I'd suppose it's possible but that type of capital stack is definitely not common in today's markets. Much more common for the borrower to have a 90/10 partner for the equity after the senior debt and junior debt.
The mezz is really taking on an equity type role in this case. Just look at the capital structure. You can call it whatever you want but you really need to see how it acts in different scenarios.
Mezz funds have a hard cap on the leverage curve now a days - closer to 85% LTV (providing 10-15% above a 70% - 75% senior). Can probably get higher if they're interested in/taking participation in the deal.
+1. The credit guys at my company won't go higher than 85% at all, though.
You could always attempt to raise equity instead of debt, but structured so as to mimic the extra loan you wanted.
I.E If you need another $10 million, but can't get it from lenders, try and find some investors willing to get a fixed X% return on a chunk of that money (lets say 80% treated as fixed rate debt) and 20% treated as an equity stake. You are basically 100% leveraged, but only paying a fixed rate for 96% of the property in exchange for a relatively small percentage of the future income, and at potentially much cheaper interest rates than a mezz lender would accept.
I have seen this done before, so I know it's do-able.
sdb,
yes. The question might come up, "Why would I do this and not control the deal?"
Well if you simply must have 99% leverage without paying absurd interest rates (or potentially not getting the loan you need at all), then this is an option to pursue. Preferred equity can be better than mezz debt, depending on how you structure it.
The highest levered deal i've seen post recession is around 93-94% - it was senior (senior lien) + mezz (junior lien) + pref (lien on partnership interests in the borrower / pledge of 100% of equity)
"TeddyTheBear:sdb,
If you are guaranteeing a fixed %, that would basically be preferred equity right.
yes. The question might come up, "Why would I do this and not control the deal?"
B/c most of the time mezz lenders don't have interest in owning the company. preservation of capital versus huge returns. if you need few shops to reach out to, let me know.
How big is the deal? I have mezz guys who can potentially be interested. PM me.
I quoted a deal (and subsequently lost) that ended up going to a cmbs shop that gave them 96% of the capital stack (75% cmbs loan + mezz / pref equity, whatever). Portfolio of quite a few office properties and they stuck when the iron was hot on cmbs a few months ago...before spreads blew out.
CMBS guys will do just about anything right before securitization if the price is right... I can't imagine many deals over 90% leverage though. 75% LTV is pretty standard without Mezz; with Mezz up to 85%.
Odit harum facere pariatur nulla voluptas quis sint. Enim numquam voluptatum aperiam. Molestiae blanditiis dolorum tempore impedit iure tempore nulla quidem. Iste assumenda sapiente voluptatem rerum at doloribus rerum. Ut cupiditate saepe impedit sapiente.
Assumenda ratione dignissimos est quaerat ea numquam illo. Recusandae voluptas cum id. Distinctio illo expedita accusamus rerum. Officia laboriosam magni magnam sit excepturi dolores vitae et.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...