Lloyds Bank has begun boosting its loan-to-value ratios and is now issuing whole loans.
It has completed its first such deal: a £147.5m, five-year loan to BMO Real Estate Partners, previously known as F&C REIT, at an LTV of 85%. It is being used to fund BMO’s £175m purchase of the 575,000 sq ft Parkgate shopping park in Rotherham, South Yorkshire from the Hercules Unit Trust.
Lloyds issuing loans at such a high LTV is eye-catching – following its merger with HBOS in 2008, the 14% public-owned bank was burdened with a mountain of distressed real estate debt as a result of irresponsible and high-leverage lending.
“When originating whole loans, we seek to do so in close co-operation with investors in subordinated risk such that we can quickly and efficiently pass this component of the capital structure to an appropriate party,” said John Feeney, managing director and global head of commercial real estate at Lloyds.
The bank has mitigated the risk associated with the higher loan-to-value ratio by selling off a £35m junior portion of the loan to Quadrant Real Estate Advisors, priced at an internal rate of return close to 7.5%.
This leaves Lloyds with a £112m senior tranche priced at just below 200 bps that sits at an LTV close to 64%, in line with senior lending levels in the wider market. Lloyds is also looking to sell down a portion of the senior debt.
Banks have been steadily increasing the loan-to-value ratios and quantum of debt they are willing to write in recent times as the lending market has become more competitive, with some borrowers becoming eager to take on high proportions of debt again, akin to pre-crash levels.
“For clients, whole loans provide joined-up, straightforward financing solutions that reduce execution risk and complexity. Many clients prefer this to separately sourced mezzanine and senior debt. Whole loans do not increase the total leverage but rather present this in a single package. However, this financing is only suitable for a subset of assets and we carefully filter all potential opportunities of this kind,” Feeney added.
