Commercial Insights - Real Estate Debt: still open for business.
Lisa Attenborough, Head of Debt Advisory, discusses the current state of the lending market and questions whether we will see another credit crunch.
2 minutes to read
What we know
The number of lenders open for business has undoubtedly decreased, but the debt market has not closed in its entirety. Whilst it is true that many debt providers have shifted their focus to existing clients and are therefore unable to offer terms for new transactions, there are still a number of active lenders across the UK and Europe who have provided indicative financing terms since the lockdown began. For transactions underpinned by robust business plans, debt finance is still obtainable.
What we expect
The time taken to close debt-backed transactions will increase. Some lenders have introduced additional ‘prescreening’ credit committees, which will act as a filter for transactions before they reach risk teams for final consideration.
An even greater emphasis on due diligence. As well as taking longer to produce (due to social distancing measures and restrictions), due diligence reports will be placed under additional scrutiny. Some lenders may need to postpone financial close until the material uncertainty clause included within valuations has been removed, whereas others will amend the loan-to-value to cater for any potential ambiguity regarding the asset value.
What we question
Will this lead to a second credit crunch? Following the 2008 Global Financial Crisis, a number of measures were implemented by regulators to ensure that banks’ capital positions would be better protected in times of economic crisis. Since the start of the year, the Prudential Regulation Authority (‘PRA’) has reduced the amount of regulatory capital that banks need to set aside by cancelling the 2020 stress test for eight major UK banks. This will help lenders focus on meeting the needs of borrowers via the provision of credit. In addition, the PRA has removed the 1% countercyclical capital buffer that banks were previously required to set aside. These important measures should support up to £190 billion of bank lending to UK businesses, which is more than 13 times the net amount previously lent to businesses in 2019.