Private credit to property that is expected to increase bank returns

A relatively new and growing form of loans in Europe is allowing banks to reduce costs, obtain the requirements for provisioning and potentially increase yields classifying certain debts as a lower risk than they would.

The new financing structure, known as “subsequent leverage”, involves borrowers who obtain a loan from a private credit fund, which in turn borrow from a bank.

The loan amount issued by the bank to the credit fund is described as less risky than an equivalent loan directly issued to the borrower, according to almost a dozen sources that CNBC interviewed for this story.

The qualified debt of lower risk means that banks must reserve a lower amount of regulatory capital, in relation to the debt that is classified with a higher risk.

“The posterior leverage generally benefits from a more favorable capital treatment than direct loans, which means that it costs the banks less to provide subsequent leverage facilities compared to direct loans,” said Jessica Qureshi, associated with the Knight Frank capital advice division. “As a result, bank lenders can offer more competitive prices for subsequent leverage transactions compared to direct loans.”

The subsequent leverage agreements are most commonly structured as “loan loan” in Europe.

CNBC understands that Wall Street Giants Citi, Bank of America and JPMorgan, as well as that of Germany German bankThe United Kingdom Standard Chartered, NatwestShawbrook and Oaknorth are among the banks that provide these loans in the London market.

Loan loan loans began to appear in the United States shortly after the 2008 world financial crisis. As regulators around the world began to implement the Basel III MarcoThe banks shunned the loans to the sectors that were perceived that they were a higher risk under the new regime.

In the United Kingdom, for example, commercial real estate has been a sector where banks have had to reduce their exposure as a result of regulations and where private credit funds have been used to help fill the void. The debt funds, initially using the capital of their investors, began to lend to the borrowers that they could no longer access the credit of the banks at attractive rates, since it was considered risky, they said experts from the industry to CNBC.

“Private credit/debt funds have constantly increased market share in the CRE loan market (commercial real estate),” said Philip Abbott, a partner of the law firm Fieldfisher, who has acted for banks and credit funds in agreements. “As a general rule, these lenders are more expensive to borrow than a bank, but they can increase the risk curve and, often, will commit to the execution of a quick agreement.”

Credit funds initially competed with banks to attract borrowers, but now they are developing a symbiotic relationship through their leverage, industry specialists said.

The availability of loans through debt funds is also advantageous for borrowers, since companies would not access credit, or would probably pay interest rates punitive to banks.

Without loans in loans, borrowers would also have to address multiple lenders if loans have high loan relations to value and negotiate customized agreements commonly known as a “mezzanine” structure.

“The borrowers are attracted to the complete loan solutions offered by the credit funds, under which they can achieve a similar level of LTV to a … mezzanine structure, but with a greater certainty of execution with a single finance supplier,” said Laura Bretherton, a financial partner of the macfaric law firm that works predominantly with credit funds.

“The borrowers also value the approach promoted by the relationship of most credit funds, and their specialized experience, particularly in alternative real estate sectors.”

A pillar of Basel Reforms III changed the way the banks calculated the risk of commercial real estate. For example, in the United Kingdom, banks tend to mark around 70% to 115% of the loan as an asset weighted by the risk, depending on the Loan duration, non -compliance probability and other credit risk factors.

In theory, for a 10 -year loan of $ 100 million to buy commercial real estate, the bank would assume that approximately 100% of the loan amount is an asset weighted by the risk.

Then I would need to reserve a minimum of 8% of the RWA, or $ 8 million in our example, as a regulatory capital. Regulatory capital has been created to act as a losses absorption mechanism to prevent bank failures.

However, if the Bank granted the loan to a credit fund, the asset evaluation weighted by the risk could fall to 20%. That means that the regulatory capital that must be reserved could be as little as $ 1.6 million, using the previous (simplified) example.

If there was a breach, banks would also be the first to pay, which reduces their risk.

“Simply, it generally means that (banks) can deploy capital in an agreement that would not be part of a lower risk attachment point that improves their adjusted yield on capital risk,” said Mohith Sondhi, senior director of debt financing in the bank based in the United Kingdom. Oaknorthwhich provides financing to debt funds.

Banks also benefit from the diversification of exposure through loans with relatively little effort. Loans to credit funds are often guaranteed in multiple underlying assets in the Credit Fund, with the credit fund, as well as the history of the borrower, also evaluated. Loans could also be titled, which further reduces the perceived risk of banks.

“By lending to private credit funds, the bank reduces its risk through the diversification achieved by investing in a portfolio (instead of a single borrower), which then reduces the capital requirement and at the same time helps the bank to obtain exposure to a high performance high performance portfolio,” said Alvin Abraham, CEO, a high -performance risk management firm and a regulatory risk management firm.

Barclays variable income analysts suggest that banks also run the risk of losing market share of private credit funds in markets where they are currently dominant, such as corporate loans to small and medium enterprises. Associating private credit funds with subsequent leverage to facilitate these loans could be a way of mitigating risk.

“The conclusion of our analysis is that EU banks would enter low -race bus IngestedABN and He“said Namita Samtani, capital analyst of Barclays, referring to the Seb Group of Sweden and the Sweden Bank, the Dutch banks and ABN Amro and the Natwest group of the United Kingdom. If the banks end up” competing “, then” the alternative would not be to lend everyone, “Samtani added.

Nicole Lux, director of the Report and Senior Research Fellow at the University of the City of London, speculated that when debt funds use loan loan structures on loan, it could represent “up to 50-60% of its total capital.”

Another recent one Knight Frank’s 100 lend surveyThe World Real Estate Consulting suggested that more than £ 100 billion ($ 126.4 billion) were collected by debt funds capable of using £ 200 billion in the subsequent leverage of the banks. The report also said that 90% of respondents said the subsequent leverage will become “the market standard” of commercial real estate loans if they have not yet done so.

“We believe firm that the subsequent leverage market will continue to be amplified, quickly becoming a central component by dictating liquidity within the CRE debt market,” said Knight Frank’s Knight advice report.

Barclays analysts say that worldwide, private credit funds have gone from the management of $ 138 billion in 2006 to $ 1.7 billion in 2023. The preqin private market data corridor has predicted that the sector will grow to $ 2.8 billion by 2028. However, an executive of Apollo Global Management, one of the largest managers in the world, according to the real market Market was the real market size. $ 40 billion in 2023.