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We have all witnessed as a result of the GFC that all lenders have taken measures to reduce their exposure on commercial property and in particular their LVR’s for loans over $10M. There is ample evidence of lenders not rolling over loans, or asking for huge principal reduction. At present the average LVR provided by lenders for commercial properties is generally between 50% - 60% for loans greater than $20M.
At the end of term, up until now the borrower’s only option was to sell the asset, raise funds from other assets to reduce the debt or arrange a second mortgage however the pricing for second mortgages at this level is typically between 20% - 25% per annum.
The Credit Enhancement Bond (CEB) has been structured to address this need in the market. In effect the CEB will insure the lender for the loan portion above their preferred maximum LVR.
For example if a property trust required a loan of 70% LVR and the lender would only go to 60% LVR the CEB would insure the lender for that portion of the loan above 60%, thereby minimising the lenders risk associated with the transacion.
Key Points:
· Minimum Loan Size: $10M
· LVR: 70% I/O, 75% P&I amortising to 70% by the end of the term
· Non-Recourse borrowers such as property trusts are welcome
· Bond Size: $2M - $10M
· Serviceability: 1.5x ICR (1.25x ICR stressed at 85% occupancy)
· Minimum 5 year average lease term for tenants
· Bond Term: will equal the term of the senior debt plus 6 months
· Issuer of the bond is a AA- Standard & Poor rated entity
· Bond Premium Charge: 5.5%-6% pa
· Arrangement and ongoing management fees apply: 0.25% - 0.50% pa
Real world pricing of the bond:
If for example, there is a $10M loan at 8% pa that requires a $2M CEB to achieve the required LVR. Then the cost of this portion ($2M) would be 8% from the bank + the bond premium of 6%, resulting in an effective interest cost the CEB porption being 14% pa.
Credit Enhancement Bond in Action
Our client was looking to refinance their existing facility of $18M which was due to expire. The lender was an overseas bank and due to the GFC was looking at withdrawing from the Australian market. The group structure was a property trust and the borrowing entity was not in a position to offer directors guarantees so the loan needed to be non-recourse.
The property was income producing with net income of $2.2M per annum and was valued at $28M. The Directors of the trust realised that it would be difficult to refinance their loan in the current market at 65% LVR and approached Global Capital Commercial to assist them as we had worked with them in the past.
Solution
The maximum that the lenders were willing to lend on a non-recourse basis was 55% on an interest only basis and 60% on a P&I basis which was short of the 65% LVR required. GCC presented the proposal to the CEB insurer who agreed to insure the proposal to 65% LVR. Once the insurance was approved the proposal was ready to be submitted to the bank at the higher LVR as it was insured above the 55% which was their limit.
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