Mezzanine FinanceDominic ReillyDirector, Jones Lang LaSalle Finance17 November 2011
Contents• What is mezzanine finance?• In what circumstances is mezzanine finance used?• What motivates a financier to prov...
What is Mezzanine Finance?           Expensive         Cheap             Debt      or    Equity                           ...
What is Mezzanine Finance?            100%             80%     EQUITY      Total Return 15% - 25% p.a.                    ...
In what circumstances is Mezzanine Finance used?                            Where the owner wishes to          Where the u...
What motivates a Financier to provide Mezzanine?          Enhanced                      Participation                     ...
How is it priced?Arrangement         Interest payment                                       Exit fees    fees             ...
How is the financier’s position secured?    As debt would be secured                      As Equity      • i.e. Charges an...
Typical providers• Duet Private Equity Ltd• Ekistics Property Advisors LLP• Investec• LaSalle Investment Management• Longb...
Typical Cash FlowPURCHASE PRICE                      Net Initial Rent  £750,000 per annum                    PURCHASE PRIC...
Typical Cash Flow                                   Year                                     Nov-11      Nov-12       Nov-...
What is the prognosis/future for mezzanine finance?Growing appetite from greater number of providers                      ...
Thank youCOPYRIGHT © JONES LANG LASALLE IP, INC. 2011
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Mezzanine Finance by Dominic Reilly (JLL)

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Transcript of "Mezzanine Finance by Dominic Reilly (JLL)"

  1. 1. Mezzanine FinanceDominic ReillyDirector, Jones Lang LaSalle Finance17 November 2011
  2. 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? 2
  3. 3. What is Mezzanine Finance? Expensive Cheap Debt or Equity 3
  4. 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. 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 theinsufficient funds/equity partner return on invested equity 5
  6. 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. 7. How is it priced?Arrangement Interest payment Exit fees fees or coupon 7
  8. 8. How is the financier’s position secured? As debt would be secured As Equity • i.e. Charges and Guarantees • i.e. Loan stock and preferred shares 8
  9. 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. 10. Typical Cash FlowPURCHASE 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 10
  11. 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 DEBTBrought Forward £6,000,000 £5,940,000 £5,880,000 £5,820,000 £5,760,000 £5,700,000Interest -£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 FINANCEBrought Forward £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000 £2,000,000Interest 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 FLOWMezzanine Invested -2,000,000Interest £200,000 £200,000 £200,000 £200,000 £200,000 £1,000,000Fees 60,000 60,000 £120,000Repay Mezzanine 2,000,000 £0Cash Flow -1,740,000 200,000 200,000 200,000 200,000 2,060,000Internal Rate of Return 12.6%Surplus Rent after Debt Service £244,000 £246,460 £248,920 £251,380 £253,840 £1,244,600 11
  12. 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. 13. Thank youCOPYRIGHT © JONES LANG LASALLE IP, INC. 2011
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