Like Mount Street’s Lloyd, Bill Sexton also believes lenders will not be willing to extend forbearance beyond the first quarter of next year.
In 2018, Sexton, who co-founded Mount Street in 2013, joined US-headquartered loan asset manager, servicer and advisor Trimont Real Estate Advisors to grow a European business. His team now services and manages €15 billion of loans. But because it entered the market at a time of limited commercial mortgage-backed securities issuance, Trimont’s European book contains only bilateral and syndicated loans.
Unlike in a CMBS structure, where the servicer manages the debt with discretion, this means Trimont’s lender clients ultimately make the decisions when issues arise. However, Sexton says lenders are increasingly relying on their loan managers to provide asset management and advice, which positions Trimont to take on workout and restructuring mandates.
For now, though, Sexton says the loan crisis in Europe has been delayed. “Lenders are granting some form of time-limited forbearance, such as waiving loan-to-value and interest coverage ratio covenant tests for an agreed period, typically six to 12 months. In some cases, lenders have agreed to holidays on capital repayments. We are also seeing modifications of loan terms, including amendments to the repayment terms.”
Across Trimont’s European book, around 20 percent of loans have been subject to some form of forbearance. However, he adds: “There comes a point where lenders cannot extend again because the debt burden becomes unmanageable. By Q1, we will start to see issues. By Q2, a year into the pandemic, my instinct is that lenders will be less inclined to extend forbearance.”
He believes the amount of amendments to repayment terms and covenant tests means the true scale of the problem facing Europe’s real estate lenders is impossible to ascertain. “Once a loan is amended, it moves from being sub-performing to being classed as performing again. It’s technically fixed. But that doesn’t mean it is performing as it was originally expected to.”
“There comes a point where lenders cannot extend again because the debt burden becomes unmanageable”
Once forbearance ends, he expects lenders to seek consensual resolutions with borrowers on distressed loans. That will involve working with borrowers to inject new equity or accelerating the repayment of loans. It could also mean working collaboratively to find fresh debt, such as completion capital for development schemes.
Enforcement action may be an inevitability for assets in the most troubled parts of the market, he adds. “We will see some lenders take the keys back, and even some borrowers hand the keys back because they do not want to put more equity into a troubled property. We are likely to see shopping centres put onto the market by lenders, probably trading as development sites.”
Another option open to incumbent lenders is to sell troubled loans to opportunistic buyers. “I suspect we will see a similar situation unfold as we did after the GFC,” says Sexton. “It started out as individual loan sales but ended with large-scale non-performing loan portfolios trading.”