Debt Advisory Market Update – July 2020
In our fourth update on the state of play in debt markets since the start of the UK lockdown, it is clear that whilst things have still not returned to the ‘normal’ we once knew, signs of green shoots are beginning to appear.
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We are seeing more requests for residential development finance than ever before. Hopefully this is an indication that activity is picking up and will feed through into the v-shaped economic recovery that we are all hoping for.
The Material Uncertainty Clause has been lifted for additional sectors, most notably institutional grade student housing and Central London Offices. This will continue to have a positive impact on lender and investor confidence in the UK real estate markets.
We are still yet to hear of any distress in the debt markets. Debt funds appear to be busier than ever in picking up the slack left by senior lenders who have decreased leverage, therefore filling a larger funding gap as a result.
Recent market volatility has highlighted the shortcomings of LIBOR benchmarks in determining interest rates for debt instruments.
We exchanged on a major post lockdown transaction last week. The lender was fantastic throughout, working in partnership with the borrower to achieve the collective goal.
We have witnessed a polarisation of lender appetite across different sectors. This can be demonstrated on the chart below which shows post COVID debt margin increases.
Interestingly, for those sectors that have been more insulated from the effects of the pandemic, the reduction in the swap rate has outweighed the increase in debt margin, thereby resulting in a lower all-in rate. This can be seen by comparing the pre-COVID all-in rate for the UK logistics sector of 2.80% (margin of 2.00% plus swap rate of 0.80%) versus the post-COVID rate of 2.40% (increased margin of 2.20% plus reduced swap rate of 0.20%).
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If you have any questions please don’t hesitate to get in touch with a member of the Debt Advisory team.