Banks have been supportive of business overall during the pandemic, but it is only a matter of time before the narrative shifts from forbearance to one of distress. Opportunistic private equity investors, mainly from the US, have raised significant credit funds designed to take advantage of special situations, distressed lending opportunities and the prospect of buying non-performing loans. The question is: will there be much business for them?
Although high-profile examples of distress in retail and hospitality have been among the unfortunate corporate legacies of covid-19, in most cases these were already struggling businesses tipped over the brink by the pandemic. According to Real Capital Analytics, sales emerging from distressed situations amounted to less than 2 percent of total investment activity in 2020 for both the US and Europe – negligible when measured against the levels seen in the immediate aftermath of the global financial crisis.
Even now, Rivercrown’s Lyons observes a great deal of pre-emptive refinancing between borrowers and lenders: “What we are seeing is that the people with fundamentally good assets with a decent business plan are actually being proactive and pragmatic because they understand they might be borrowing at considerably more expensive rates than their last loan. But on the plus side they can stabilise and focus on re-opening and executing their business plans. I would say it is more pressure than distress.”
Europe’s loan servicers are well-placed to monitor potential distress across lenders’ portfolios. Among them is Trimont’s Sexton. He agrees that there is still a lot of “consensual restructuring” in the market. “There is enough money out there enabling borrowers and, to an extent, lenders, to re-capitalise, introducing new equity and debt into structures resulting in continued consensual solutions being found,” he says.
Some anticipate distressed real estate will surface soon, including Cerberus Capital Management. The US private equity giant has raised $2.8 billion for its global opportunistic real estate strategy, which includes investing in NPL portfolios. Cerberus was one of the major buyers of toxic loans across Europe after the GFC.
“The distress may be there, but outside the retail sector the distressed pricing probably is not”
Trimont Real Estate Advisors
Sexton says loans and assets are being sold “quietly” by banks. He believes it unlikely that big pools of NPLs will flood the market this year: “People are maybe selling because they have got no opportunity to continue to hold an asset. But they are not getting distressed pricing; they are getting proper pricing. If you put a real asset in the market now you are likely to get multiple bids for it. So, the distress may be there, but outside the retail sector the distressed pricing probably is not. Will we see distressed pricing in the next 12, 24, 36 months? That may, in part, depend on when and how fast interest rates rise.”
Whatever the timing, the widespread view is that distress is unlikely to become the pre-eminent force in real estate investment that it was for several years after the GFC. Although most expect the European market’s recovery to yield significant lending opportunities, few are convinced they will be akin to the rescue financings that were widespread the last time the market came back from a crisis.