30th November 2020
The role of debt advisers in these uncertain times
J Paul Getty once said that without the element of uncertainty, pulling off even the greatest business triumph would be dull, routine and eminently unsatisfying. At the time, the oil tycoon was the richest man in the world, so his acceptance of less-than-perfect odds had done him no harm.
Getty died in 1976 so we’ll never know if he would have enjoyed success in the shockwaves that the Covid-19 pandemic brought to the debt markets earlier this year, let alone the lingering doubts around Brexit. What we can be sure of – if the real estate sector is anything to go by – is that clients are greatly valuing expert advice and support in what remains a tricky borrower landscape.
Despite the macro-market uncertainty there are record-breaking numbers of banks and non-bank lenders actively seeking to support good deals and acting as sponsors to finance. The wall of lender money has been boosted by institutional and private equity investor diverting funds to debt strategies, whether via their own lending platforms or supporting third-party loan managers. As with many areas of capital markets and professional services, the real estate finance sector seems to have stabilised since the (very quiet) summer of 2020, although funders will no doubt proceed with great care for the foreseeable future.
Lender caution is reflected in senior debt’s Covid premium. While margins have narrowed since the pricing shock in March 2020, they are still higher than pre-pandemic levels, especially across retail and hospitality businesses as would be expected. The story is more varied with mezzanine capital, depending on the size, shape and structure of debt-fund lenders.
The goalposts have moved significantly for many clients, so conversations with both incumbent and prospective lenders need to be managed. Many loans have unavoidably required an element of restructuring including capital repayment holidays and covenant waivers to accommodate a temporary fall in income. The flexibility and cooperation of lenders has generally been encouraging, possibly to avoid the PR disaster of acting overly aggressive or to perhaps to avoid marking-to-market prematurely.
The pendulum swings both ways. Lenders might also be faced with their own challenging circumstances in unexpected times like these. Despite a willingness to help borrowers, there may be a feeling of relief when a debt advisor is able to present a client with an alternative funding solution. This may become more important into 2021, when wider cracks such as large scale tenant defaults can no longer simply be plastered over. At that stage there will likely be a wider restructuring role for the debt advisor.
Looking ahead, the picture is not necessarily a bleak one. Whilst a number of deals stalled (predominantly development projects) as advisors we have still seen a number of significant loans since the start of the pandemic. For well capitalised lenders looking to deploy funds against high quality assets managed by proven sponsors, there are now opportunities available at more attractive risk-adjusted returns than at the start of the year. Whilst transaction volumes are down, a number of clients will be looking to refinance their core, stabilised assets, particularly in the office and residential sectors, enabling them to lock into swap and gilt rates that remain at historic lows. This trend is likely to continue for banks and alternative lenders.
A holistic view of the market and longstanding relationships with lenders mean that debt advisors are well-placed to help clients navigate an increasingly dynamic and unpredictable market. We can base our advice on the broad range of comparable data we gather about lenders’ appetites across specific sectors and types of project. Ultimately pricing will be dictated by the market but through generating competitive tension between a targeted number of lenders the economics can be optimised for the client’s benefit.
Debt advisors flourish in an environment like this, when there is such a diverse lender landscape. Maintaining relationships with all key players in the market is extremely time consuming and is not an effective use of resources for borrowers. By working in close collaboration with clients to understand their assets and finance requirements, the more empathetic adviser can focus on negotiating and delivering optimal borrowing terms, enabling them to focus on covering the property market to deliver existing projects or source new transactions.
Ironically, none of this would have appealed to Getty. He often ignored expert advice and was notoriously parsimonious. However, we would like to think that in a volatile multi-faceted market the right expert advice and guidance more than pays for itself.
For further information, please contact:
Adam Buchler | Co-Founder
T: +44 (0)20 7647 9000
M: +44 (0)7809 13 14 15
Article Originally Published Here