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real estate finance - spring news 2013

12 February 2013

Since our last update, we continue to see positive developments as follows... 1. LTVs We have seen that for strong corporates certain banks are prepared to lend up to 70 of LTV rather than the lower market standard (55-65) - thus increasing quantums and the opportunity to get deals away. 2. More activity in the secondary market

We've also seen banks getting comfortable again about lending into the secondary market where yields are considerably above those for prime assets. Quantum, LTV and rental income covenants will reflect the lower quality of these secondary assets but its a positive sign that there is more activity here. 3. Unitranche funding in the REF sector?

Unitranche is a blend of senior and mezzanine funding, so the pricing is higher than senior but lower than mezzanine, typically 6 - 12 . Unitranche funding can be beneficial for borrowers as it will have looser restrictions and financial covenants than with senior debt. The greater risk to lender is reflected by the higher margins. Also, Unitranche funding is often provided with a bullet repayment profile (ie no amortisation) and it will typically be made available by one lender rather than a syndicate. This benefits the borrower because if the borrower needs consents etc it just needs to liaise with one lender. To date unitranche funding has mainly been used on mid-market corporate leveraged acquisitions. However, could it be suited to a borrower in the REF sector on a buy and build strategy with the conditions relating to each asset disposal or acquisition being lighter than with senior debt? 4. The capital regime and slotting!

This continues to have an important impact in the market and has led to banks actively deleveraging their REF facilities, portfolio sales to private equity and the continued activity of insurers in the REF market. Will the latest developments from the Davos World Economic Forum and Basel assist the sector? A couple of observations here: (a) McKinsey & Co. said in 2010 that Basel IIIs liquidity rules mean European banks may need to raise as much as €2.3 trillion in long-term funding. At Davos the point was made that insurers, the biggest buyers of such debt, are being dissuaded from buying long-term bonds issued by banks under the Solvency II capital rules (which apply to insurers), which makes them more expensive to hold. Tidjane Thiam, Group Chief Exec of Prudential, added "at a high level they want banks to have more capital and you know who owns the banks - its us .....and Solvency II says that we cannot invest in banks." So watch this space to see if this pressure leads to some relaxation here to help bank funding. (b) The Basel committee has after intensive lobbying given banks a further four years to build up their liquidity buffers - and agreed to count more types of assets as liquid. The banks have long complained that being asked to build up capital assets that are so easy to sell that it would allow them to remain solvent for a 30-day credit crunch restricts their ability to lend. So the banks will now no longer need to meet this new rule by 2015 but 2019.

Helpful news for the banking sector which hopefully will feed through to freer lending in the REF sector.

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