In this valuable article from Real Estate Capital, the issues facing lenders on retail property financings and the lack of palatable solutions are explored.
Property values are falling as a consequence of forced rent reductions via CVAs as well as retail insolvencies generally, potentially leading to loan-to-value covenant breaches. But what should a lender do next? And how might a borrower (aka landlord) react?
Forcing a property sale when buyers can't get gearing will mean that prices are depressed, harming recoveries and potentially wiping out equity value. There are many buyers of debt out there, but lenders are often unwilling to accept the low-ball offers they're seeing. Rights to trap cash and block returns of excess money to sponsors may be available to lenders, and that might drive a sponsor to de-lever or fund capital investment in property assets - with the emphasis on "might".
For lenders, taking control strikes me as the least-worst option. Although the article suggests that banks aren't very good at asset management, and therefore wary of taking the keys on a retail centre, I have seen the right combination of lender and retail property manager make this work. Fund lenders are likely to fare even better as they will often have the ability to potentially deploy further capital to unlock solutions, such as the conversion of parts of a scheme from retail to residential, in return for an equity-type return once they've taken ownership (whether through enforcement or otherwise).
For sponsors, the key way to hold on to an asset is the classic: have a clear turnaround plan and a commitment to fund it, and find a way to persuade the lenders to support you over the time that will take (which might include sharing some of the up-side).
Doing nothing is an option for everyone, on the assumption that debt continues to be serviced, but (despite the government's promises around business rates) that doesn't seem to be viable over the longer term... as we kick off the new year, the time to take action may be upon us.