Mezzanine Loans and Intercreditor Agreements - a REFlection on the market
In May 2014 we published an article https://www.fieldfisher.com/publications/2014/05/intercreditor-agreements-in-the-real-estate-finance-market-the-quest-for-efficiency#sthash.l1MKlDmm.dpbs, to mark the announcement by the LMA that it was launching a template Intercreditor agreement for the real estate finance market, which it duly delivered to the market the following month.
In September 2014, we hosted a seminar to discuss the template, and comparing and contrasting alternative structures and documents. At that point in the market, there was a clear opportunity and market need for mezzanine lenders, to bridge the LTV gap resulting from senior lenders post GFC caution. Towards the end of 2014, in our view, market sentiment improved considerably, and senior lenders began to stretch their LTVs higher, reducing the demand for the mezzanine loan product.
Nearly one year on, is the mezzanine market making a comeback? Despite the best efforts of news services such as Costar to publicise transaction closings, a number of private deals are closed, so it is difficult to say with authority. However, the pressure on margins for senior lenders will inevitably result in lenders seeking access to higher risk/higher return transactions where mezzanine loans can play a key part in the capital stack.
The transaction and debt structure envisaged by the Loan Market Association in the template Intercreditor Agreement appears to be gaining credence in the market, under which the mezzanine lender provides its loan to a parent company of the senior borrower, but many, particularly international investors, query the need for such complexity.
Our seminar last year covered these issues in detail and for guidance on the same please contact our team.