Why Include Junior Debt in the Capital Stack?

Developers need to contribute more equity on the average levered development transaction. As interest rates have increased, the interest rolled up in a development facility increases, reducing the surplus funding which can provide a land advance, ultimately giving rise to a funding gap in the capital stack. This gap is further exacerbated by lenders scaling back the leverage they are willing to underwrite for transactions.

Junior debt has emerged as an increasingly popular solution to the funding gap even more so with third-party equity less readily accessible. Whilst several of our senior lender partners can go up to 65% LTGDV on development facilities, there’s a notable presence of junior lenders in the market willing to extend support beyond 70%. On a loan-to-cost basis, some of these lenders have an appetite to exceed 90% of cost, materially reducing the equity requirement for strong borrowers.

With the aforementioned covenants, junior debt can be seen as an alternative to equity. Opting for junior debt allows developers to put in less of their own equity, boosting their Return on Equity and IRRs.

Junior debt is typically priced on a fixed basis between 15 – 22% p.a. Junior debt should be cheaper than equity given its place in the capital stack. Moreover, junior debt typically allows developers to retain full control of their company and asset whilst retaining all profits. It is important when selecting a junior lender that there is an existing relationship with the preferred senior lender as Intercreditor Agreements can be challenging to negotiate in short timescales.

At GL Capital, we have extensive relationships with mezzanine lenders working across all asset classes. We have successfully structured mezzanine facilities at up to 97% LTC.

To learn more about working with us or to discuss a particular debt requirement, I can be contacted on 07521 630 655 / 0203 089 0697 / jack.schiavo@glpg.co.uk.

Alternatively, to speak with another member of the Capital Advisory Team. please email finance@glpg.co.uk or call 0203 336 7377.