Michael Hynes Stamford Capital
Michael Hynes of Stamford Capital says developers are increasingly returning to mezzanine finance. Image Supplied.
  • Mezzanine finance is a unique hybrid of debt and equity finance
  • Strong pre-sales allow off-the-plan developers to secure this type of financing
  • Lower debt costs have also facilitated demand for mezzanine financing

Mezzanine financing is a unique hybrid of equity and debt financing that gives the lenders, in the case of default, the right to convert to an equity interest in the company.

Mezzanine loans don’t require payments during the term of the debt itself but rather at the end of the term. The main advantage of this is a company can improve its cash flow, helping it to pay off other debt first along with investing in the business.

Traditionally, this type of financing offers more generous returns but is riskier for both parties – owners are at the risk of losing equity and lenders risk losing their entire investment. In the case of bankruptcy, mezzanine lenders debt may not be fully recovered as senior debt holders get paid first.

According to Stamford Capital Joint Managing Director, Michael Hynes, savvy developers are using trading bank lenders and incorporating mezzanine finance into their development finance stack, due to strong sales demand for off-the-plan developments.

“Residential is back with a vengeance and particularly over the last six months, off-the-plan developers are able to show the strong pre-sales needed to secure mezzanine finance through the main trading banks.”

“Bank appetite for mezzanine hasn’t changed, yet over the last few years many developers struggled to meet pre-sales criteria in the wake of the GFC and stricter lending rules resulting from the Royal Commission. But that  landscape is completely transforming with a surge in residential pre-sales, making mezzanine finance more attainable.”

Michael Hynes, Stamford Capital Joint Managing Director

Mr Hynes added that the surge in residential pre-sales is transforming this landscape. He believes this makes mezzanine finance more attainable, as the combination of trading bank senior and junior debt in a development finance stack remains more competitive than non-bank senior-only alternatives.

“Our modelling indicates the savings are around 15%-20% of your borrowing costs. We closed a $20 million capital stack recently using bank and mezzanine, which proved $250,000 cheaper than the alternative non-bank senior-only solution,”

Notably, the company has seen banks closing mezzanine loans over existing investment assets. Traditionally for their lower risk profile, banks have favoured pre-sold developments.

Mr Hynes expects this trend to continue in the post-pandemic world.

“Mezzanine on existing investment assets is a new trend, no doubt helped by lower debt costs post-COVID relieving ICR covenant pressure. These stacks are presenting as a cheaper cocktail relative to the non-bank senior only alternative.”

You May Also Like

Westpac sees rates hitting 4.1 per cent and property prices falling further

Westpac said, “2023 will be another challenging year, particularly as the RBA continues to ratchet interest rates higher.”

Home loan hacks: four way to save money on your mortgage

With interest rates expected to keep rising, Compare Club has tips to ease the mortgage pain.

CoreLogic’s guide to navigating a looming ‘fixed-rate cliff’

Many borrowers will feel mortgage pain when they next refinance

How much does it cost to move house?

From cleaning fees to moving services, the costs of moving houses can add up fast

Top Articles

PropertyGuru Asia Property Awards (Australia) returns for its 7th edition, including several brand new award ...

This year's awards include several brand new categories, with entries closing 2 August 2024.

Housing crisis survival guide: How to buy your first Australian property

Three property experts give the low down on how to nab a home in this tough housing market.

Strata properties as investments: All you need to know about investing in a Perth unit

As the cost of renting approaches the cost of a mortgage, more people are investing in units to escape the rental trap.