The number of former senior property bankers re-appearing, reincarnated, on the debt-buying side has gone up noticeably in the past few months. These guys (and gals) were the people who worked for the likes of Barclays Capital, Merrill Lynch and Morgan Stanley, where they originated billions of pounds of property debt and pushed it out fast through the capital markets in the years running up to the credit crunch.
After that, business imploded from early 2008, when the securitising banks cleared out most of their teams. Many of these bankers were out of the market or kept a low profile while some of the dust settled. Between them, they know the parties involved in every large European property deal done with debt in the bull years: the largest sponsors who borrowed the debt; the people at the insurance companies and pension funds who largely bought AAA- rated CMBS; and the banks, building societies and hedge funds that bought B notes, from their distribution desks. They also know where the bodies are now buried.
They are starting to put that knowledge to use. After some false starts, former bankers are running the handful of mezzanine debt funds that have recently got off the ground, such as Duet Private Equity’s and M&G’s funds. These vehicles are relatively small, as are their investor bases, but their teams say they are starting to see a flow of potential deals because there is genuine demand from some borrowers for subordinated debt, which they cannot get from banks any more because banks are only lending senior debt.
Another trend is the early signs of a private placement market for debt developing again, whereby institutional investors such as pension funds and insurance groups that once bought AAA CMBS will directly provide new senior debt on deals brought to them by boutiques set up by former bankers. Natalie Howard, once at Morgan Stanley and Lehman Brothers, is looking at private placement at AgFe, while Bell Capital Partners is setting up a club of investors to make senior loans. Debt and risk management adviser JC Rathbone Associates is pondering alternatives to traditional bank lending.
Cynics might say it would be ironic if those who once worked at banks that pushed too much leverage onto property now put themselves forward to be paid to sort out some of the fallout. But if they have good ideas, why not? Some of the active lending banks will disagree with the thesis put forward by Robert Bell of Bell Capital Partners, who argues that for large deals, there is still no functioning banking market and hence no liquidity. Bell has a colourful turn of phrase and is evangelical about the ‘tsunami’ of refinancing that needs more than the banking market to make inroads into it. But ultimately, his challenge will be no different from the one facing anyone else operating today: to find deals that work for borrowers and lenders, when the outlook for property values still remains so uncertain.