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In practice there are senior lenders that put up part percentage of the cost of a project such as 75% to 85% these would include most of the major British banks and some of their foreign counterparts. They have a lare deposit base and plentiful funds to lend.

Then there are merchant banks and specialist property lenders who might be inclined to take an element of equity risk by putting up mezzanine finance or entering into profit sharing arrangements.

In practice the two categories might overlap. In other words the same bank that put up the senior debt might also be prepared to be prepared to provide the mezzanine finance, which is more risky. This is sometimes done by merchant banks which are able to put together a syndicate of senior lenders, the merchant bank my not necessarily put up much of the financing themselves.

To give an example if a bank agrees to organize a syndicated finance of say £100,000,000 for a development project, the a two possible ways the deal could be arranged. The bank could try to put together a syndicate of banks which would agree to put up a specific portion of the money required. Or the bank could provide all the money itself, providing the whole £100,000,000 at an agreed rate, that is say a certain percentage over libor. This would provide an advantage to the developer in getting him the finance faster, but on the flip side this would be more risky for the bank itself.

If the developer wants to raise more than the the 75% to 85%loan to value ratio, the developer could use mezzanine debt and possibly give up a share of the profits of the development. Another approach that could be used is to take out insurance on the project.

This is very similar to the process used by individuals who are buying a house and want t take more than 75% of the value. The buyer needs to pay a one off indemnity premium to cover the proportion of the loan over 75%. Therefore the lender knows that if he has to sell the house to recover his loan and the proceeds of the sale fall short of the advanced, he is reinbursed by the insurer for losses on the portion of the loan above the the original 75% of value.

Thus in a similar way specialist lenders can provide indemnities against the loss of loans secured on commercial buildings, as protection for the lenders. To give an example if the banks were only able to provide a loan of up to 75% of the loan to value. The insurer might be able to provide a guarantee of up to 95%. For a one off payment from the developer.  As a consequence the bank might be prepared to lend up to 95% of the size of the loan as they know that they are protected not just by the security of the property but by the strength of the insurance company.





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