During the second half of 2023, we have noted that while lender and borrower discussions around loan refinancings and restructurings have remained largely consensual, the number of ‘stressed’ loan positions has continued to increase.
We anticipate that this trend will continue into 2024 and that we will see an increase in ‘distressed’ loans during the first half of the year. While interest rates have stabilised in recent months and the market expectation is that the next move will be down, it is likely rates will remain higher for longer. The higher rate environment, and the negative sentiment around some asset classes and geographies, sets the backdrop for refinancing discussions as we head into the New Year.
As we move into 2024, we expect that, in the main, sponsors that are well capitalised and see equity in their assets will continue to show support for their investments, through loan prepayments from equity or targeted asset sales. Where sponsors inject capital, lenders will continue to work with them, and there will be a continued collaborative approach to loan refinancings.
However, as property values fall, we also believe there will be an increasing number of sponsors that are unwilling or unable to support their transactions. There are likely to also be some sectors and geographies where there is simply no lender appetite to restructure or refinance existing loans as they reach loan maturity. This will result in more loan sales, albeit discreet ones, and ‘non-consensual’ property disposals.
It is our opinion that the level of ‘non-consensual’ activity might be more pronounced than the market expects. But we believe that such activity will be phased and gradual during the year, and we do not expect to see the same degree of distress that was evident during the early stages of the global financial crisis. There is also more liquidity in the market, and we believe that equity investors, at home and abroad, will be willing to make strategic investments for targeted assets and sectors.
There will no doubt be losses across the entire European continent, but there are still many investors and lenders with capital to deploy and there will be sectors and locations that will present attractive opportunities at rebased values. Investments in the residential and logistics sectors, together with investments in prime central London locations, continue to be sought after.
However, we think that the flight to quality, in relation to both sponsors and properties, will be even more pronounced as we move through the economic cycle. This activity will be driven by existing and new debt funds that are able to move quickly and with fewer regulatory constraints than their competitors from the banking sector. That said, we think the banks will still have a part to play, even if that is likely to be increasingly by providing back leverage finance to alternative lenders.
Dean Harris is executive managing director, EMEA, for loan servicer Trimont.