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CMA
June 22, 2018  

Banks "Stretch' to Mezz Debt to Win Loans

Amid fierce competition for business, the balance-sheet lending operations of some banks have grown more willing to originate higher-leverage loans.

Shops that previously limited loan-to-value ratios to 65% have lifted the ceiling to 70-75%, structuring the added component as mezzanine debt that will be sold to third parties. The goal is to attract borrowers by providing “one-stop shopping.”

“The borrowers love that execution, instead of dealing with multiple lenders,” said one bank pro.

While securitization programs operated by banks have long originated debt packages and sold off the junior portions, the maneuver has been unusual for their balance-sheet units — at least since the market crash.

Over the past few years, Morgan Stanley has employed the tactic. Now some of its rivals — including Bank of America, Barclays, Capital One, Natixis and Wells Fargo — are following suit. Middle-market lenders, including CIT, are also kicking around the idea.

The banks aren’t seeking to retain higher leverage on their books. Rather, with an eye toward winning new business, they are willing to assume the risk of holding mezzanine loans until buyers can be found. At BofA, the commercial MBS group, which has long placed mezzanine debt, is helping its balance-sheet colleagues distribute their subordinate debt.

The strategy is a twist on “stretch lending,” the mezzanine lenders’ version of one-stop shopping. Starting about five years ago, high-yield players like Blackstone, Brookfield Asset Management and Starwood Property began originating the whole credit stack themselves, retaining the junior portions and selling the senior debt. That enabled them to lock in mezzanine-loan investments, while also capturing most or all of the origination fee for the senior debt.

Similarly, banks are now adopting the strategy to get into the driver’s seat, enabling themselves to line up senior-debt investments and control the origination fees.

Barclays employed stretch lending last month on an $850 million floating-rate debt package it originated for Blackstone on an office portfolio. The bank sold the $100 million mezzanine portion to an unidentified insurer and planned to syndicate most of the senior debt, while retaining perhaps $150 million.

The mortgage is one of the first large financings arranged by Barclays since it revamped its balance-sheet lending platform late last summer. It hired former HSBC executive Kristin Khanna as a director to spearhead syndication efforts, and brought aboard vice president Shazim Hasan from Aozora Bank. The group’s focus is leading and syndicating floating-rate loans for institutional borrowers on properties in major markets.