Commercial Insights: Restructuring and recovery: Breathing space for borrowers, but for how long?
Marc Nardini, Head of Restructuring and Recovery, addresses the impact on real estate loans, lenders’ potential for leniency, and the sectors most at risk of default.
3 minutes to read
What we know
Individuals and corporates with debt secured against all real estate asset classes will be impacted by implications of COVID-19. However, every situation is unique and it would be incorrect to assume that all secured debt will become impaired as a result. Nevertheless, there are significant challenges in the present time to overcome for most borrowers to remain compliant with their debt obligations.
For commercial property, the upcoming June rent collection will be closely observed. Poor rent collection is putting pressure on borrowers’ cash flow and ability to service their debt, particularly prevalent in retail, leisure and hotel sectors. Limited rent collection, tenant default and market sentiment are in turn causing LTV issues as the capital values begin to contract.
In general, lenders are providing breathing space for most of their customers. This partly due to the many restrictions; FCA regulations, mortgage payment holidays, risk of negative PR and media coverage, an inability to progress some actions via the courts and the latest reform to UK Insolvency Law. However, customers with existing pre-pandemic issues are under increasing pressure from lenders to perform.
What we expect
Lenders will provide further breathing room to borrowers during the period of restrictions. This is to follow FCA and Government guidance and wait until the courts are able to enable enforcement actions. In addition, lenders will be waiting until transactions start completing in the different sub-markets so they can fully understand their exposure and risk on a customer-by-customer basis.
Where they can, lenders will try to support their customers. Those lenders that have the ability and depth to their loan portfolios will provide customers with more time to resolve their debt issues. However, some smaller lenders such as challenger banks and mezzanine and bridging lenders may not be so accommodating. It is therefore likely that they will be under more pressure to progress with enforcement action much sooner in the cycle.
The sectors most at risk of imminent enforcement action by lenders are those with existing structural challenges predating COVID-19 and, then those most hit because of the virus. We expect to see many retail and leisure assets, leased hotels, buy to let portfolios and development sites (mixed-use and pure residential) to be more at risk of enforcement action.
What we question
How long can lenders pause the loan cycle and remain flexible? It would seem that many lenders have stopped taking on new business and are likely to do so for the foreseeable future until more certainty and fluidity to the markets has been restored. They also appear poised for the right time to commence the recovery of their stressed and distress debt positions but wish to do so without drawing criticism from the media and the regulators.
Support and breathing space will not go on forever. Once market and economic confidence does begin to return, we expect lenders to take aggressive steps to re-position their loan portfolios, re-evaluate their risk appetite and to redeploy capital at a rate possibly not seen for over two decades. As a result, will this create an artificially competitive market for debt and capital from Lenders, Private Equity and other sources and will it be a rush to deploy debt and capital in what is anticipated to be a growing and thriving market?