Covid has caused congestion in loan distribution, but the market is gradually returning

The fallout from the coronavirus has led to a significant slowdown in the syndication market during the second quarter.

European real estate loan syndication activity has slowed significantly during Q2 because of the uncertainty created across the market by the covid-19 pandemic.

Market sources argue distribution has not come to a complete halt but concede that sales of slices of property loans are less frequent. The recent lack of investment has led to an absence of large financing mandates that require several lenders to share risk, they add.
Norbert Kellner, head of syndication at German mortgage bank Berlin Hyp, admits the crisis has had a “deep impact” on the syndication market.

“There is still a market, but banks have all had to take time out to work out how to handle the covid-19 crisis,” he says. “There was, therefore, a time when banks could not give a positive response when invited to participate in a syndicated loan deal. In recent weeks, banks have begun to look carefully at what they are prepared to finance, but some say they can only do bilateral loans or small loan amounts.”

Jessica Bell, a capital markets director in the syndicated finance division of Dutch bank ING, says the bank’s focus has shifted somewhat to providing finance to key clients while limiting syndication market risk.

“We’ve looked at providing finance through pre-arranged clubs, coordination roles and structures with deferred drawdowns,” she explains. “Syndication market participants still call us to say they are happy to look at deals. Some have indicated they are increasingly willing to consider such deals for key clients.”

In May, London-based property debt advisor Conduit Real Estate wrote in a market update that some banks and debt funds were still holding loans issued prior to coronavirus-related lockdowns as they had not been able to sell them on to the bond or institutional debt markets.

“There is a fair amount of indigestion on investment banks’ books, particularly in the French market,” ConduitRE wrote, adding: “We understand there are some banks contemplating enlarging their balance sheets in the medium term to house these loans.”

Not open for business

Speaking to Real Estate Capital, Jonathan Jay, partner with ConduitRE, says some investment banks are “not open for business” when it comes to new loans.

“Some closed deals pre-covid, and pricing has subsequently moved out, or syndication market participants are less willing to buy paper,” he explains. “There is congestion, and the investment banks for the most part are on a watching brief. Alternative lenders are open but offering senior risk at mezzanine pricing.”

“Things have slowed,” agrees one real estate investment banker, speaking in private. “In March, there was very little syndication in Europe and those lenders with loans written pre-covid found it very difficult to get traction with buyers. Potential syndication partners were trying to assess the impact on their existing portfolios, let alone buy new paper.”

The investment banker adds that those investors with a broad mandate to buy debt were more likely to look for opportunities in public markets in March, focusing on a repricing in structured debt products such as high-yield bonds and corporate debt. “By April, although capital markets had not stabilised, more market participants had assessed the impact of covid and were ready to pick up conversations they had been having in February.”

In early April, it is understood that Bank of China took an £800 million (€895 million) position in the financing – by US banks Citi, Morgan Stanley and Bank of America – of private equity firm Blackstone’s £4.7 billion acquisition of UK student accommodation platform IQ Student Housing. Although a significant example of a loan syndication during lockdown, it seems to be an outlier.

“The appetite for banks to underwrite is not being tested”

Jessica Bell

Some lenders have been left holding more debt on their balance sheets than they would have liked, sources say. “There aren’t too many large positions being sold down in the syndication market now, but some lenders have smaller positions that they are trying to move, in sectors such as hotels, and assets aren’t trading,” says Bell. “Corporate banks like us underwrite with the intention of holding pieces and selling a portion, but investment banks aim to hold a much smaller percentage of the overall underwrite. Also, there is a decreasing trend in final holds.”

She adds that lenders’ ability to sell down debt is largely connected to the amount of flexibility written into margin pricing in the loan deals: “The question is how much economic flex did lenders build into deals to start with, and whether pricing has shifted so much that the flex will not make the deal work.”

The investment banker concurs that pricing has moved out – by as much as 30 basis points on prime property loans and up to 60bps for secondary real estate. “Some lenders might prefer to hold on to loans rather than try to sell down into this market. Banks are better capitalised than in 2009. Most large underwriters of distribution product have the ability to keep loans on balance sheet for the foreseeable future if they don’t see liquidity or prices have moved out to such an extent they think they may make a loss.”

Holding debt

The other distribution route for real estate financiers is the commercial mortgage-backed securities market. Securitisation activity is on pause, the investment banker says: “CMBS feeds off activity and pricing in other asset-backed securities markets. Some ABS markets have reopened and there is some issuance, but liquidity remains low and there needs to be stabilisation of pricing before people can consider that. We also need product.”

ING’s Bell argues the slowdown in syndication activity is more a result of fewer large loans being written because of less investment activity, rather than a lack of appetite among syndication market players. “The market lacks paper,” she says. “Sponsors are not as focused on buying large assets over €1 billion right now. So, the appetite for banks to underwrite is not being tested.”

Lenders argue there has not been an exodus of syndication market participants. Kellner says: “The usual suspects, such as the German banks, are still responsive. They are pickier and more careful, but they are still there. No one is saying ‘we are shut down’. But they are warning us that they are more selective, or deals may take more time.”

Some argue certain lender groups are beginning to make a return. One source says Chinese banks have shown interest in re-entering the market, as well as some South Korean investors. However, another says Asian syndicating partners are more likely to take sub-€30 million participations to head office in their home countries, which they were not required to do pre-crisis, leading to delays and more frequent refusals from credit committees.

Sources agree that, for the time being, there will be less new business by those banks that operate originate-to-distribution models.

“Banks are not going to want to run big distribution risks right now, so any large transactions are more likely to be structured as a club,” says the investment banker. “It might mean sponsors are more reluctant to do big deals, like a large take-private or a portfolio, because they might be concerned about getting it financed.”

Kellner agrees: “Before the crisis, I’d have said that, for the right transactions, there was always liquidity. If a loan was not offered, it was for a reason. Now, liquidity to the sector has definitely reduced, but it hasn’t dried up.”