Stretched Senior Debt Finance

We're Stretched Senior Debt Development Finance specialists

Stretched Senior Debt is a hybrid financial tool that blends senior debt and mezzanine finance features, offering borrowers more capital at moderate risk and cost. It's ideal for property development scenarios where greater funding is needed without the high costs of mezzanine or equity financing.

We secure Stretched Senior Debt finance for capital-intensive property development in the UK.

Our Stretched Senior Debt Development Finance service

  • Market-leading stretched senior debt property development finance up to £250m
  • Experienced developers only
  • Combines Senior Debt Finance and Mezzanine Finance
  • Loan to value ratio of up to 90%
  • Loan terms are flexible and depend on the project
  • Interest rates between senior and mezzanine debt finance
  • Allows for larger project development
  • Provides flexibility to the borrower
  • Gain access to larger sums of money 
  • Complex structures - offshore and non-UK residents
  • All UK and certain EU jurisdictions considered
  • Upscale and run multiple projects
  • All asset classes considered

Get a quote


2024 Stretched Senior Debt Development Finance Guide

Stretched senior debt finance is a financial tool that allows companies to raise additional development finance by combining a senior debt and mezzanine debt. This type of financing is commonly used by developers seeking to increase the total loan amount available to them from a project. It's typically used during the construction phase to fund property development and often is a form of refinancing as its used primarily after a senior debt facility exists. In this guide, we will explore the characteristics, features, workings, user profiles, and benefits of stretched senior debt finance for property development.


What is Stretched senior debt development finance?

"Stretched senior debt development finance" is a lending design for property developers that combines senior debt development finance and mezzanine finance elements. It offers higher loan-to-cost (LTC) or loan-to-value (LTV) ratios than traditional senior debt alone. This financing approach enables developers to secure a larger portion of the project’s total cost through debt, reducing the amount of equity they need to contribute.

In a standard development finance structure, senior debt usually covers up to 60-70% of the project costs, with any additional financing required being raised through equity or mezzanine finance. However, stretched senior debt can extend this to around 80-90% of the project costs, allowing developers to undertake projects with less initial capital but potentially higher interest rates due to the increased risk to lenders.

This type of financing is beneficial in scenarios where developers aim to maximize their leverage on available capital while keeping the cost of capital lower than bringing in a mezzanine lender or more equity partners. The risk is that in the event of project underperformance or market downturns, the higher debt levels can also increase financial vulnerability.


Characteristics and features

Extension of Maturity: Stretched senior debt finance involves extending the maturity date of existing senior debt. This allows the company to repay the debt over a longer period, providing increased flexibility in managing its cash flow.

Adjusted Terms: The terms of the existing senior debt, such as interest rates, covenants, and repayment schedules, may be modified to accommodate the company's changing financial circumstances.

Priority of Repayment: Senior debt holds a higher priority in repayment than other types of debt or equity in a company's capital structure. Stretched senior debt maintains this priority, ensuring that existing senior debt holders are repaid before other creditors or shareholders.


How Stretched Senior Debt works

The process of implementing stretched senior debt finance typically involves the following steps:

Step 1: Assessment of Financing Needs: The company assesses its capital requirements and determines the amount of additional funding needed. This could be for growth initiatives, acquisitions, or refinancing existing debt.

Step 2: Engaging with Lenders: The company initiates discussions with its existing lenders or seeks new lenders who specialise in stretched senior debt finance. These lenders evaluate the company's financial position, growth prospects, and ability to service the debt.

Step 3: Negotiation and Agreement: The company and lenders negotiate the terms of the stretched senior debt, including the maturity extension, interest rates, and any necessary changes to covenants. Once an agreement is reached, the terms are documented in a new loan agreement or amendment to the existing agreement.

Step 4: Execution and Implementation: The company and lenders execute the new loan agreement, and the funds are disbursed to the company. The company then uses the capital for the intended purposes, such as funding growth initiatives or refinancing existing debt.

Step 5: Ongoing Repayment: The company makes periodic interest and principal payments according to the revised terms of the stretched senior debt. The extended maturity allows for a more manageable repayment schedule, reducing the immediate financial burden on the company.


Users of Stretched Senior Debt

Stretched senior debt finance is commonly utilised by established companies in various industries. The typical users of stretched senior debt include:

Mid-sized to large companies: Companies with a solid operating history, positive cash flows, and existing senior debt are prime candidates for stretched senior debt finance.

Private Equity-backed companies: Private equity firms often employ this financing tool to support the growth of their portfolio companies or facilitate acquisitions.

Companies undergoing restructuring: Stretched senior debt can be used by companies going through financial challenges or restructurings to provide additional liquidity and enhance their ability to meet obligations.


When to use Stretched Senior Debt

Stretched senior debt finance can be used in several scenarios:

Growth Initiatives: When a company wants to fund organic expansion, launch new products or services, or enter new markets, stretched senior debt can provide the necessary capital to fuel these initiatives.

Acquisitions: Stretched senior debt can be used to finance acquisitions or strategic partnerships, allowing companies to expand their operations and strengthen their market position.

Refinancing: When a company seeks to improve its debt structure, reduce interest costs, or extend debt maturities, stretched senior debt can be an effective refinancing tool.


Benefits of Stretched Senior Debt

Increased Financial Flexibility: By extending the maturity and adjusting the terms of the senior debt, stretched senior debt finance provides companies with greater flexibility in managing their cash flow and debt repayment obligations.

Additional Capital: Stretched senior debt allows companies to access additional capital without diluting existing shareholders or resorting to more expensive forms of financing.

Favourable Interest Rates: Companies with a strong credit profile may be able to negotiate favourable interest rates, resulting in lower borrowing costs compared to alternative financing options.

Potential Covenant Flexibility: The adjusted terms of stretched senior debt may provide more flexibility with financial covenants, giving companies greater room to manoeuvre and execute their business strategies.


Example property development scenario using Stretched Senior Debt Finance financing

MGS Developer Limited are looking to purchase a piece of land for their new development project. They plan to build a medium-sized residential complex made up of 10 two-bedroom apartment buildings. 

MGS have decided to fund the project by pursuing Stretched Senior Debt Finance financing. This type of financing is used to fund property projects with a loan that combines both senior debt and mezzanine debt. The “stretch” loans are larger in size and features, specialised loan terms, and borrower education.

To pursue this type of financing, MGS will need to apply through a lender that offers such services. Once they are approved, the lender will provide them with a loan that combines a senior debt portion and a mezzanine portion, both with variable terms and repayment structures. 

MGS will need to identify a reputable builder to erect the residential complex. Along with the construction contractor, they will also need to identify vendors for various materials and supplies needed for the project. Once the project is complete, the lender will inspect the progress and, if approved, provide the funds to cover the remaining costs.

If the project is approved, MGS will be required to make regular payments to the lender. The loan’s repayment schedule will be based on the loan’s terms and the revenue generated through their sales. 

MGS will also need to secure the necessary permits and licenses for the development project. Since the project falls within the jurisdiction of the local planning, they will need to obtain approval from the local government before they can begin construction. 

Once they overcome any regulatory roadblocks, MGS can focus on finishing the project and marketing it. 

If successful, the development project can potentially generate a steady stream of income for MGS and help them realise their property development business.


Conclusion

Stretched senior debt finance is a valuable tool for companies seeking additional capital while maintaining the priority of their existing senior debt. By extending the maturity and adjusting the terms of senior debt, companies can enhance their financial flexibility, fund growth initiatives, and achieve strategic objectives. It is essential to engage with experienced lenders and assess the specific needs and circumstances of the company before embarking on stretched senior debt finance.


Remember, before making any financial decisions, it is advisable to consult with qualified professionals such as accountants, lawyers, and financial advisors who can provide tailored guidance based on your specific circumstances.

Disclaimer: This guide is intended for informational purposes only and should not be considered as financial or legal advice. Borrowers should consult with qualified professionals and conduct thorough due diligence before pursuing Stretched Senior Debt Finance or any other financing options.


We're experienced financial experts who can help you arrange Stretched Senior Debt Finance.

Call me back

Call our professional team on 01202 612934we're ready to help.

We use cookies. By using the website you agree with our use of cookies. For more information, please read our privacy policy.

Okay, got it!