Subordinated debt finance

We're Subordinated Debt Development Finance specialists

We help secure Subordinated Debt Finance for property developers in the UK when a development or project requires extra cash but has limited access to Senior Debt Finance. We source finance from the UK's High-Net-Worth Individuals and investors, Family Offices, and private Equity Institutions.

Our Subordinated Debt Development Finance service

  • Market-leading Subordinated Debt Finance up to £250m
  • Residential development
  • Residential refurbishments
  • Increased access to finance for development projects 
  • Allows for flexible terms to suit individual circumstances 
  • Lower rate than other forms of secured lending 

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2024 Subordinated Debt Development Finance Guide

Subordinated debt development finance is a financial tool that enables a company to finance property development via raising capital by issuing debt instruments with a lower priority of repayment than senior debt in the event of liquidation or bankruptcy.

This guide aims to provide a detailed understanding of subordinated debt finance, its characteristics, features, working mechanism, target users, suitable scenarios for its use, and the benefits associated with its utilisation.


What is Subordinated Debt Development Finance?

"Subordinated Debt Development Finance", or mezzanine finance, is a type of financing used primarily in property development. This form of finance fills the gap between senior debt, typically provided by banks or traditional lenders, and the equity the developer needs to fund a project. It is termed "subordinated" because this debt has a lower priority for repayment in case of default, sitting below the senior debt in the capital stack. Developers often use this type of financing when they need additional funding that exceeds what senior lenders are willing to provide and when they prefer not to dilute their equity further. It generally carries higher interest rates than senior debt due to the increased risk taken by lenders.


Characteristics and features of Subordinated Debt Finance

Lower Priority: In the event of liquidation, subordinated debt holders are paid after senior debt holders, but before equity shareholders.

Higher Risk, Higher Return: Due to the lower priority of repayment, subordinated debt carries higher risk compared to senior debt, resulting in potentially higher interest rates.

Flexible Terms: Subordinated debt financing offers flexibility in terms of interest rates, repayment schedules, and conversion options into equity.

Convertibility: Some subordinated debt instruments may include conversion features that allow the lender to convert the debt into equity under predefined conditions.


How does Subordinated Debt Finance work?

Issuance: A company seeking capital issues subordinated debt instruments, such as subordinated bonds or debentures.

Investor Subscription: Investors, such as institutional investors, private equity firms, or venture capitalists, subscribe to the subordinated debt offering.

Repayment and Interest: The company makes regular interest payments to subordinated debt holders during the agreed-upon term. Repayment of principal occurs after satisfying higher-ranking creditors in case of liquidation or bankruptcy.

Conversion (if applicable): If the subordinated debt includes a conversion feature, the lender can convert the debt into equity based on predetermined terms and conditions.


Who uses Subordinated Debt Finance?

Growing Companies: Startups, scale-ups, and high-growth companies often utilise subordinated debt to raise capital while maintaining ownership and control.

Leveraged Buyouts (LBOs): Acquiring firms in leveraged buyouts may use subordinated debt to finance a portion of the purchase price.

Expansion and Acquisition Financing: Companies seeking to expand operations or finance acquisitions may use subordinated debt as a source of funding.


When can Subordinated Debt Finance be used?

When Senior Debt Capacity is Limited: If a company has exhausted its senior debt capacity, subordinated debt can bridge the financing gap.

Maintaining Ownership and Control: Subordinated debt allows companies to raise funds without diluting existing shareholders' ownership stakes.

Higher Risk Appetite: Businesses willing to offer higher returns to investors in exchange for accepting higher risk may consider subordinated debt.


Benefits of using Subordinated Debt Finance

Additional Capital: Subordinated debt provides a means to raise additional capital without diluting ownership or control.

Flexible Financing: Subordinated debt allows for flexible interest rates, repayment terms, and potential equity conversion, tailoring the financing structure to fit specific needs.

Risk Mitigation: By including subordinated debt in the capital structure, senior debt holders may have reduced exposure, which can enhance the overall creditworthiness of the company.

Attractive Returns: Investors seeking higher returns may be attracted to subordinated debt offerings due to the increased risk associated with these instruments.


Example of a property development scenario using Subordinated Debt Finance

Property development is a high-stakes project that can bring stores of profits – or overwhelming losses. Developing property with production loans and venture capital can present numerous chances to realise higher returns; however, to develop ventures, gaining access to proper financing is essential. Subordinated debt, a common form of financing for many developers, is can be an ideal solution.

In this example, consider a commercial real estate developer who is looking for project financing for a large-scale office park project. The developer has already acquired the land, and is about to begin construction on the project. Knowing that traditional financing sources would likely not cover the entire cost of the project, the developer turned to subordinated debt financing.

Subordinated debt financing involves essentially “stacking” several layers of debt, with each layer subordinating to the debts preceding it. In this particular case, the developer was able to secure a first mortgage from a specialist lender for approximately two-thirds of the total project cost. A second lender also granted a subordinated loan for the project, receiving priority over the other debt but taking a secondary position to the first lender’s first mortgage.

With the addition of their own capital, this concession allowed the developer to bridge the gap between traditional financing sources and the project cost, safely creating a secure business opportunity for themselves. Having established the subordinated debt facility, the developer had the assurance of lower monthly payments for their financing – in addition to project completion being virtually guaranteed.

Both parties derived mutual benefit from the arrangement. On the one hand, the subordinated debt provider made an attractive interest rate from their loan. On the other hand, the developer was able to access the capital they needed to pursue their commercial real estate development goals with greater confidence. Altogether, the success of this property development was reliant upon the developer’s ability to find an ideal financial solution – and in this case, subordinated debt helped the developer realise their goals with advantageous terms.Write an in-depth example of a property development scenario where Preferred Equity Finance was used.


Conclusion

Subordinated debt finance serves as a valuable tool for businesses seeking to raise capital while accommodating risk profiles, maintaining ownership control, and addressing senior debt capacity limitations.

By understanding its characteristics, working mechanism, and benefits, companies can make informed decisions when considering subordinated debt as a financing option. 


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 Joint Venture Finance or any other financing options.


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