Draft real estate lending guidelines centred on four best practice pillars – transaction structuring; documentation; due diligence; and intercreditor arrangements – have emerged from CREFC’s European lender committee, chaired by BNP Paribas’s Peter Dento.
Based on a single advance, secured, investment loan with multiple properties, some of the key recommendations include that senior debt lenders are repaid first according to requirements within pro forma documents; interest cover acts as an early warning trigger rather than reflecting that disaster has already struck; and a lender has the right to call a valuation at least annually and when it believes there is a default outstanding or where a default might arise as a consequence of such a further valuation.
When it comes to warning milestones, deals often have only a simple covenant breach point that moves the transaction immediately from “performing” to “default”. Therefore the committee recommends that cash sweep triggers that occur on ICR/LTV ratios be designed to reflect that a deal has moved beyond only a moderate deterioration point.
On some deals other ratio triggers might allow a lender greater rights, such as the ability to have greater sign-off on asset management strategies or to replace the property or asset manager.
Furthermore, the mechanisms for the replacement of lenders have been found wanting. Examples of this are “tranche warfare” and loan-to-own strategies. As a result, proposals have been put forward regarding comprehensive drafting permitting syndication, securitisation and loan tranching to facilitate good balance sheet management and foster market liquidity.
There should also be consideration as to whether other lenders get consent rights in certain circumstances, such as sales to non-banks or vulture funds pre-default, or the sale of subordinated debt by that creditor. CREFC Europe intends to seek feedback from the market on the lending guidelines during the first quarter of this year, and will review them annually.