What is senior stretch finance? // March 19, 2018

stretch-senior-finance

Have you heard about senior stretch finance before? Here at TechRound, we take a look at this type of finance and whether it could be an option for you.

What is senior stretch finance?

Senior stretch finance tends to provide a larger percentage of finance to companies than senior debt usually through a hybrid loan structure that offers a combination of a cash flow loan and asset-based. It is also known as ‘unitranche’ financing. This can be anywhere from 70% of the Gross Development Value or up to 90% of project costs with roll-up interest. It will usually combine a mixture of mezzanine financing as well as senior finance. This type of finance tends to be most commonplace in the property sector provided by companies such as Mischon Capital, but also used by companies to finance leveraged buyouts.

But just how exactly does the ‘stretch’ aspect of this particular type of financing come into play? Well, these sorts of loans will ‘stretch’ into helping to finance the borrower’s needs. How far individual lenders will ‘stretch’ does vary. However, this is usually at a much higher risk to the lender than you would experience normally with senior loans. As a result of this higher risk, it usually means that the borrower will have to pay a higher interest rate.

Why are lenders willing to make stretch senior loans if there is more risk involved? It comes down to the fact they have a senior claim of security on both the cash and asset flow. The consequence of this is they will receive a higher return.

Who are senior stretch loans suitable for?

Generally speaking, senior stretch loans tend to be best for companies who:

  • Do not have predictable or stable cash flows, but that do have a considerable asset base. This is because opting for a cash flow loan only would be a lot more expensive (and also probably smaller) for such a company
  • Who have healthy cash flows but conversely have a lower asset base. In this scenario, it is better to opt for a senior stretch loan as a pure asset-based loan would like to not be enough.

Advantages of senior stretch finance loans

Convenience

Having essentially the features of both a senior loan and mezzanine finance makes borrowing far more convenient for a company. Why? Well, you save time by not needing to contact one lender for a senior loan, and another for mezzanine finance, as senior stretch loans combine both aspects.

In addition, you will not have to sort out two sets of inter-creditor agreements, and two separate sets of paperwork, making the documentation far more streamlined than it otherwise would have been which is also far more convenient, with many stretched senior finance companies offering a fast turnaround when it comes to terms,with this often taking less than 48 hours. This turnaround is usually far quicker than other types of loans.

Less expensive

Combining this senior debt with junior debt together tends to be less expensive for the borrower than if they were to have a separate loan. Furthermore, not having two separate lenders to go through means you will also reduce the payment for legal fees, as well as reduced monitoring costs.

Spreading equity

The senior stretch loan also helps to reduce monitoring costs in the property sector as the stretch part of the loan enables the borrower to spread their equity over a larger number of projects if they so wish.

The ability to borrow more

As we have previously mentioned, the stretch senior loan combines the functions of a senior loan and mezzanine financing. This means that you are able to borrow at considerably higher leverage than you would from having just one product.

Less risk as a borrower

Whilst there is more risk for lenders, it tends to work the other way for borrowers. This is because you are less likely to have to give up a pledge of equity.