99% LTV With Mezz Financing?

teddythebear's picture
Rank: Neanderthal | 2,057

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?

Comments (21)

Jan 7, 2013

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.

BossMode

Jan 7, 2013

You can talk people into anything bro. Make it rain.

Jan 7, 2013

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.

Jan 7, 2013

Standalone asset. For example, an office building or an apartment.

Jan 8, 2013
TeddyTheBear:

Standalone asset. For example, an office building or an apartment.

Generally that would be Mall, Office for informational purposes.

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Jan 8, 2013
TeddyTheBear:

Standalone asset. For example, an office building or an apartment.

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.

Jan 7, 2013

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.

Jan 12, 2013

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.

Jan 16, 2013
nelobynature:

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.

Jan 16, 2013

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.

Jan 16, 2013

sdb,

If you are guaranteeing a fixed %, that would basically be preferred equity right.

Jan 16, 2013
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?"

Jan 19, 2013

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.

Jan 20, 2013

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)

Jan 23, 2013

"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.

Sep 6, 2013
synn1313:

"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.

We weren't talking about a deal big enough for a mezz lender to be interested

Sep 10, 2013

How big is the deal? I have mezz guys who can potentially be interested. PM me.

Aug 29, 2013

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.

Sep 5, 2013

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%.

Sep 10, 2013
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