Bank of America Merrill Lynch has restarted pitching for European real estate financing mandates, targeting the world?s largest private equity investors as the investment bank looks to compete with Goldman Sachs, Deutsche Bank and Citigroup, CoStar News understands.
The US investment bank has already submitted terms sheets on a number of financing requirements, and has some balance sheet capacity in place to support BAML?s rebuilding of a European real estate financing client base.
BAML has been meeting with many of largest real estate investors in London in recent weeks in the investment bank?s tentative plans to rebuild a client base to underwrite senior loans and distribute the bulk onto buy-to-hold senior lenders.
The three principal financings which are likely to be considered by BAML are: senior loan underwritings, which are majority-distributed; structured mezzanine lending; and loan-on-loan financing of non- and sub-performing commercial real estate loan portfolios from deleveraging banks.
BAML push into European real estate lending across the capital stack, will be undimmed by the recent departure of?Mike Mazzei, who headed up the commercial real estate debt capital markets group, and left the bank after almost three years?for Ladder Capital, the US commercial real estate loan originator,?late last month.
Mazzei is a securitisation veteran: he was a founding member of Lehman Brothers CMBS practice in New York in the 1980s, heading the securitisations business for several years during a 20-year career at the fallen investment bank.
Jerome Anselme, a director in the real estate finance team, also quit two weeks ago?to join Northwood Investors, a privately-held real estate investment adviser set-up in 2006 by former Blackstone President and CEO of Blackstone Real Estate Advisors John Kukral.
The European mortgage business, which comprises commercial real estate, is headed by Martin Migliara, who reports to the overall global head for mortgages and securitised products, Michael Nierenberg.
The recent departures, however,?will not dampen BAML?s returning appetite to restart senior lending, particularly given the attractive price differential in Europe over the US.
In January, BAML hired Steve Lapham, as a managing director and global commercial senior risk executive, from Credit Suisse,?to oversee credit for commercial real estate across Europe and the US. Prior to which, he spent 10 years at Deutsche Bank?s?in the New York?credit team.
Lapham, BAML?s senior credit officer, has been in London, over from New York in recent weeks, to meet with a number of key clients to build an idea of idea of the financing requirements of its core US private equity firms and REIT clients.
BAML?s emergence as a competitor to the large underwritings is thought to be, at least in part, the sustained high margins which senior debt is written at in today?s climate. Because of scarcity of available debt, Basel III compliance as well as banks? own rising funding costs, senior debt pricing necessitates the prevalence of high margins.
Even when the multi-billion senior debt funds eventually emerge, realistically they will require at least 4% to 6% internal rates of return (IRRs), perhaps even higher in the stretched senior space, to provide the returns promised to investors during capital raising periods.
Senior debt, therefore, remains the most important part of the capital structure. In Europe in the last 12 to 18 months, investment banks such as Deutsche Bank, Goldman and Citigroup are all competing now to be principal senior loan underwriters that move on the bulk of their balance sheet after picking up fees from both principal sponsor and end senior loan buyer.
But in the loan-on-loan space, the margins tend to be attractive enough for some banks to hold at least part of the debt.
Deutsche Bank has been attempting positively to re-start the securitisation market with two deals in the last year and the promise of another later in 2012, and has a demonstarted in recent deals its ability to underwrite big ticket loans, such as the Kennedy Wilson loan which was synidcated to M&G Investments, and while the preference tends to be to move on the balance routinuely, the German bank often retain exposure.
Goldman has also been competing to finance major senior loan underwritings ? including last week winning the financing mandate for Blackstone?s acquisition of Devonshire Square from Rockpoint and ADIA with a ?210m five-year senior loan ? and loan-on-loan financings.?
Citigroup has also closed a string of deals in the last four months, including simple senior financing, a structured mezzanine loan as well as financing Lone Star?s ?923m Project Royal portfolio acquisition from Lloyds Banking Group, in a combined ?300m four-year loan with Royal Bank of Canada, priced at 600 bps over three-month LIBOR.
Most investment banks expect the huge backlog of European bank-held supply to come to market piecemeal over the next five to eight years, with product in varying degrees of distress and more often than not requiring that elusive attractively priced senior debt financing.
BAML and all banks declined to comment.
jwallace@costar.co.uk
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