PropList Blog
Real Estate Finance Exiting Finance

Existing Finance

Our experience is that lenders are generally adopting a case-by-case review of existing loans now with the benefit of information about payment (or non-payment) from the recent IPD. We would expect that lenders will carefully consider which of their borrowers are genuinely experiencing difficulties arising from COVID-19 impacted trading, rather than perhaps looking to exploit the situation. Lenders are also trying to assess whether the underlying income streams will likely bounce back or be permanently impacted, and if the latter by how much.

Lenders will no doubt be expecting sponsors to step up to support borrowers. However, one lender commented that the COVID19 impact doesn't seem like just an "equity" risk and therefore it is appropriate that lenders and sponsors share some of the downside pain.

In practice, we have seen a range of approaches with a lender focus on their borrowers' short term needs. Some lenders are holding off providing formal waivers whilst in practice not looking to accelerate or enforce – this lack of certainty is often unnerving for borrowers. Some lenders have issued a reservation of rights letter whilst allowing financial covenant holidays and non-payment of interest. Others have started to agree more formal amendments to allow deferral of principal repayments until the next IPD and capitalisation of interest. Where it is agreed that interest due to a mezzanine lender will also be deferred, this will likely not be paid until the final repayment date.

Although lenders are, in some cases, cautiously reviewing their security packages to understand what their longer term options may be, there seems to be no particular desire by lenders to immediately precipitate lots of loan enforcements with the recognition that this could be challenging both practically and from a reputational perspective. There is also a fair amount of Government pressure for lenders to continue to support borrowers such as the letter from the CEO and Deputy Governor of the Prudential Regulatory Authority on 26 March, providing guidance to bank lenders including on the treatment of borrowers who breach covenants due to COVID-19 with the aim of ensuring that banks continue to support the real economy and provide loans.

Some have expressed concern that once one lender starts to act aggressively, many others will follow suit, but so far the lending fraternity seems to be holding its nerve. There is also a sense that how any market participant (whether that be landlord, employer or lender) behaves during this crisis, will be noticed and marked for better or worse. If the impact of COVID-19 continues for a few months only, lenders may well be prepared and able to weather the storm. A more protracted impact starts to raise questions.