Manager’s quoted senior debt vehicle will finance property beyond the M25, writes Alex Catalano
ICG-Longbow’s senior debt fund, Senior Secured UK Property Debt Investments, made its debut on the London stock market this month, trading at a modest 2p premium to the 100p placing price.
The placing raised £104m from mainly small institutions and wealthy individuals, the latter taking about three-quarters of the initial public offering, attracted by the 6% income return and 8% internal rate of return promised to investors.
“They cottoned on to the defensive nature of what we are setting out to provide: senior secured debt, not mixed with anything else,” says ICG-Longbow chairman David Hunter.
SSUP’s investment strategy is very different from that of Starwood European Real Estate Finance (SEREF), the second debt fund listed in London in as many months, which raised €228m, some of it from Starwood.
SEREF seeks whole senior and mezzanine loans in the UK and northern European countries such as France and Germany, and its first deal is a £19m mezzanine loan to Maybourne hotel group.
SSUP plans to capitalise on the dearth of debt outside the M25. “We hope to create a UK, not a London portfolio,” says Martin Wheeler, ICG-Longbow’s founding partner.
“It’s the guys we’ve supported for the past 15-20 years, mainly private property companies that, through a geographic or sector focus, have access to deals. Because they’re not well-known names, they’re not looked after by the active lenders.”
Banks provide new opportunity
Wheeler adds: “We’re starting to see a new category of opportunity: forced refinancings of performing loans. Banks working on non-core books are saying: ‘We want our money back’, and the people who get singled out are the ones that have a lot of equity at risk.”
Says Hunter: “We are not competing with central London banks, but our lending is quite attractively priced as senior money on today’s property yields. The rationale is the property market pricing; if a property yields 9%, there’s all sort of things you can do if someone borrows at 7%. It makes sense.”
Senior debt is a new patch for ICG-Longbow, which has mainly focused on the mezzanine market. It has just held a first closing for UK Real Estate Debt Instruments III, having raised £212m of a £500m target.
The fund will follow the same path as its £242m predecessor, UK Real Estate Debt Instruments II, in making first-charge, whole loans with a mezzanine element.
Wheeler doesn’t term this structured finance. “We’re destructuring; taking what would have previously been two parts of an intercreditor agreement and turning it into a single senior loan,” he says. “It’s more than just a first charge whole loan with some mezz. We’re backing value creators.”
The fund’s return target is roughly similar to the previous fund’s 14%. “Number one is the income component – we’re achieving high single digits – and the rest is through back-end profit shares,” says Wheeler.
“The difference between Fund III and II is longer duration; we’re getting exactly the same kind of components, but with back-end profit spread over a longer period, which means a few points down on overall internal rate of return, but a higher investment multiple and income over a longer period.”
As of last August, Fund II, which is now fully invested, had loaned £230m in 15 transactions with an average weighted coupon of 10% and was producing a gross 17.1% internal rate of return.
One high-profile funding was its £32m whole loan to refinance a provincial office portfolio for Max Property last year. The loan, maturing in September 2016, has an 80% loan-to-value ratio, with Max paying a 9% coupon.
Once Max has also received a 9% annual return on its equity, Longbow is entitled to 30% of the net profits on sale.
Higher-profile borrower base
“That’s not typical of the deals we were doing, but as I see the profile of our borrower base rising, I think those will continue to happen,” says Wheeler.
A more typical mezzanine deal was the £118m refinancing of midtown London office building 120 Holborn, owned by a consortium of Indian investors. Deutsche Bank provided £80m of senior debt and Longbow teamed up with asset manager Wainbridge to provide £40m of mezzanine.
“It would be a trophy asset but for the fact that there was one and a half years on the lease to BT,” says Wheeler. “But scraping the layers away a bit you could see a sub-tenant community there paying market rents.
The strategy was to take it through lease renewal, re-let to the sub-tenants and get some new tenants in, in a supply-constrained market.”
Wainbridge will manage the property. “We’ve known them for years, but it’s our first deal with them where we’re side by side in the risk,” Wheeler says. “They’re driving the value creation.”
Other also less typical deals included financing warehouses on long leases with fixed uplifts. “We weren’t expecting to. It was a function of the borrower having unique access to opportunities,” Wheeler adds.
“You wouldn’t think there would be room in the pricing but it’s the entry point – we backed guys who were buying off-market. The entry price was a 6-7% yield as opposed to a likely 4-5% elsewhere.
“There is also a quite highly structured student accommodation deal. They were all provincial deals. That helps; we travel well.”