There is a pattern that recurs across mid-market European real estate acquisitions, and it catches experienced sponsors as often as first-timers.
A sponsor agrees an acquisition comfortably below independent valuation. The financing plan is straightforward: a new senior facility, first-ranking security, replacing any legacy debt. Then the bank indications arrive — and they are calculated not from the independent appraisal, but from the bank's own valuation parameters, which sit materially below it.
Nobody has done anything wrong. Banks lend off their numbers, not the appraiser's. Regulatory capital treatment, internal risk models and house lending policies all pull the bank's view of value below the market's. But the difference between those two views has to be funded by something, and that something is a junior gap — on a €50–100m acquisition, typically €10–20m.
This gap is not a flaw in the deal. It is structural, it is permanent, and it has been widening for over a decade as regulation has pushed bank loan-to-value thresholds steadily downward. The question is not whether the gap appears. It is what the sponsor does next.
Where junior layers stall
The instinctive next step is to go looking for capital: approach mezzanine funds, circulate a summary, wait for terms. The ask goes out loosely framed — an amount, an asset, a story.
The first questions that come back are almost never about the asset. They are structural:
What security does the junior lender actually get? The senior lender holds the first-ranking land charge and, in most cases, everything else worth holding — account pledges, rental income assignments, insurance claims. Senior documentation routinely prohibits second-ranking security over the property and share security over the property-owning company. What remains for the junior lender is often a pledge over shares in a holding company one or more levels above the asset — structurally subordinated, one step removed from the cash flows, and complicated to enforce. An enforcement of that pledge can itself trigger change-of-control provisions in the senior facility, which means the junior lender's remedy risks detonating the very structure it is trying to recover from.
How is the sponsor's own money subordinated? Shareholder loans for future capital expenditure need full, documented subordination to the senior — and the junior lender needs to understand precisely where it sits relative to them. In some jurisdictions, subordination arrangements also interact with insolvency law in ways that reward careful drafting and punish boilerplate.
Who holds the security, and how? Where multiple creditors share a package, someone has to hold it. In civil-law jurisdictions the mechanics are not trivial: certain security interests can only be held by the creditor of the secured claim, which is why structures such as parallel debt exist to allow an independent security trustee to hold the full package for all secured parties. Done properly, this is invisible plumbing. Done badly, it surfaces at exactly the moment the security is needed.
What does the intercreditor look like? The intercreditor agreement — the contract between senior and junior defining who is paid when, who can enforce what, and what happens on default — is consistently the longest single item between term sheet and funding. It is negotiated deal by deal, from scratch, between parties with opposed incentives.
Every one of those questions gets answered eventually. The problem is that when the junior ask goes out unstructured, each prospective lender prices the uncertainty of all of them at once — or declines to spend the time. This is where junior layers stall: not because the capital isn't there, but because the sponsor is asking lenders to underwrite a shape that doesn't exist yet.
Flip the sequence
The alternative is to structure the junior piece as a finished instrument before it goes anywhere near a lender.
That means the security package is defined first: what the junior lender receives, documented against what the senior permits. The shareholder loans are subordinated on agreed terms. The holding structure for the security — an independent security trustee, with the mechanics appropriate to the jurisdiction — is in place. The intercreditor terms are drafted, not promised. Where it helps distribution, the junior piece can be wrapped as a single-tranche secured note and placed privately, so that what a lender receives is a defined instrument with a defined security package rather than an invitation to negotiate.
The difference in outcome is not subtle. A well-structured junior instrument can be assessed in days: the lender's credit work is about the asset and the sponsor, because the structural questions arrive pre-answered. A loosely framed mezzanine ask is a months-long negotiation in which the structural questions crowd out the credit ones — and in which the deal's momentum, and sometimes the deal itself, is the casualty.
Same gap. Same capital. Different sequence.
What this asks of the sponsor
Very little, in capital terms — that is rather the point. The junior layer exists precisely so the sponsor does not have to bridge the bank's conservatism with equity. What it asks for is discipline in sequencing: treat the junior tranche as a structuring exercise with a placement at the end of it, not a capital search with the structuring deferred to whoever turns up.
It also asks for independence in the middle of the structure. The party structuring the junior instrument, holding the security and running the process should not be competing with the lenders it is placing to, and should not hold a position in the deal itself. Lenders price conflict as risk. A structure with no one's thumb on the scale is easier to assess, and easier to say yes to.
That is the work we do at Bluewater: structuring the junior instrument, acting as security trustee over the package, providing agency through the life of the deal, and putting the finished instrument in front of the right lenders — without a lending book and without a competing stake. Most sponsors come to us for one of those. The other three are usually why they stay.
If you are a sponsor or advisor looking at a junior gap on a live acquisition, we are happy to talk through the structure before you go to market.