One of the perks of being a servicer is being able to see a wide cross section of market participants and in 2023 we see our lender clients behaving in one of two ways; with the bank and institutional lenders lending less and alternative lenders seeking to fill that void and bridge the funding gap.
For investors that have loans maturing in 2023 the cost of debt has risen but new market participants are there waiting to help borrowers retain assets. The viability of any capital injection, however, will depend upon whether the equity cheque is large enough as well as the extent to which the increased cost of the debt versus the underlying yield means it is still worthwhile to invest in the asset.
The climate crisis means that 2023 will be a critical year for transitioning assets to a low carbon economy, given the estimated £100 billion (€114 billion) of capex that is required to adequately deliver the UK’s necessitated green upgrade, according to Mount Street data. Due to sustainability targets, lenders will be forced to consider how they can assist with this, as well as establishing their own sustainability criteria.
Due to this, there will be opportunities for those willing to look at clever solutions to solve non-ESG compliant assets. Falling asset prices could also result in investors seeking to create value through enhancing environmental performance and sustainability credentials. This could be a chance for traditional and alternative lenders to combine their capital and bridge the green capex void.
Elsewhere, we see lenders hunting for the safest assets and sponsors, and similarly, on the occupational side, prime properties present the lowest voids and are, therefore, low risk. With higher rates of return lenders can now afford to be more selective and support the best projects. Towards the end of last year some lenders did not lend unless the sponsor was a strategic client with which they had previously done business. If this cherry picking continues into 2023 such super-sponsors will have more opportunity, choice and power when negotiating with both lenders and vendors.
The pricing gap is closing more quickly than in previous market downturns with instances of 20 percent falls in valuations or more, but with rates going in the opposite direction this makes for an understandably difficult time and borrowers are nervous. It is possible that the more conservative LTVs that we saw following the GFC will mean that banks will still have skin in the game despite plummeting values. This could mean lenders are more open to foreclosing, or at the very least forcing the borrower to agree to a consensual sale.
Borrowers with embedded extensions in their low margin loans will be doing everything possible to ensure these are activated but with hedging costs rocketing, lenders will be asked to consider moving out the required cap strike rates in order to reduce the borrower’s upfront hedging costs. This is when the strength of the cashflow and the covenant of the tenants will need important consideration to see if that gap up to the strike rate can be supported. Cash in a controlled account will always help ease lender concerns.