DUO Deleveraging

Semper specialises in complex, high loan sum, transitional bridging facilities. We characterise these using the Acronym ‘DUO’ which stands for ‘Deleveraging’, ‘Unbundling’ and ‘Opportunity’.

Today, in part 1 of our 3 part series, we delve into ‘Deleverage’, which involves lending while assets are sold, and debt is reduced.

Applicants are usually asset rich but need certain, trustworthy capital to achieve a specific outcome quickly, while employing a strategy to exit. Semper’s job is to reduce stresses on cash-flows while assets are sold.

Borrowing provides leveraged returns for both property developers and investors:

• Developers calculate the total anticipated cost of capital necessary to complete sales to determine profitability,
• Portfolio investors calculate the cost of borrowing versus rental yields to achieve leverage returns in a growing market while managing cash-flows and tax through balanced negative gearing.

During the recent years of historically low interest rates, borrowers were able to support very high levels of debt gearing. However, as interest rates rose, the economics of borrowing changed. Property portfolio investors found the cost of interest outstripping rises in rental income, which destabilised the balance of negative gearing and placed loans in jeopardy. Developers were faced with a reduction in project profits, especially with Covid completion delays and supply chain disruption.

When the cost of borrowing causes negative cash-flows or eroding profits, it is necessary to deleverage by sale as quickly as possible without dumping the value of assets.

Semper has recently provided support to a developer with residual stock, stuck in a development loan with a high line fee, and to a property investor whose portfolio was put in default by a non-bank lender when interest payments were delayed. Settling out existing facilities, of between $12 and $16 mil, Semper structured the facilities with prepaid periods to free up cash flows while properties were sold in an orderly fashion. In both cases we reduced the cost of borrowing considerably.

A controlled deleverage process with a considerate and understanding lender will always yield the highest possible retention of equity for the borrower.