Cass report: Lenders face £43b refinancing and rising losses

Heightened refinancing risk and a rise in debt write-offs and losses are some of the challenges facing the UK lending market says the latest Cass survey.

According to the Cass UK Commercial Real Estate Lending Report produced by Cass Business School, lenders must refinance £43 bn-worth of loans in 2020/21.

At the same time, the coronavirus crisis means they could face further loan write-offs and debt losses for the retail sector of between £8 bn and £10 bn, while £14 bn of residential development loans could be potentially partially written off as construction is delayed.

Central banks and regulators have said payment freezes agreed by lenders should not trigger classification as forbearance or distressed restructuring if based on countries’ (different) measures for supporting economies. However, the survey’s author, Dr Nicole Lux, said that while this change in capital treatment will offer short-term relief, ‘some businesses will not recover in the long term and the losses of these loans will need to be reflected in banks’ balance sheets.’

The refinancing challenge comes at a time when liquidity has been reduced by the coronavirus, constraining a majority of lenders. Larger transactions are difficult, particularly for investment banks which sell down loans, because lenders and brokers say that the syndication and securitisation markets have shut.

Meanwhile some commercial banks have tipped into overweight positions lending on real estate after property companies and REITS scrambled to draw down revolving credit facilities and liquidity lines as the crisis began. “That is altering the competitive landscape in some places. They may say: “Our property book has increased by X% - should we even be looking at new business at this point?”’ one banker suggested to PropertyEU.

These situations could make refinancing the £43 bn difficult. The report’s figure implies almost the same level of refinancing in each of the next two years as last year, when 54% of a total £43.8 bn lent was refinancing, the survey says.

The £43.8 bn of new loan origination in 2019 was a 12% decline on 2018 (£49.6 bn), in line with lower property investment volumes.

Peter Cosmetatos, chief executive of the Commercial Real Estate Finance Council Europe, said: ‘The £43 bn of UK debt requiring refinancing during 2020 and 2021 sounds more challenging in today’s conditions of economic lockdown and material valuation uncertainty than it would have done in normal times.’

Tom Brook, director in debt & structured finance at JLL which is one of the survey’s sponsors, said JLL believed a differentiator entering this crisis is the diversification in today’s lending markets as opposed to previous cycles, with a much more developed non-bank lending sector of institutional lenders like pension funds and insurance companies, and debt funds.

‘We expect that today’s balanced pool of lenders will help support liquidity and a better functioning credit market than in previous downturns,’ Brook said. Non-bank lenders originated 26% of 2019’s new UK business (£11.6 bn).

However one lender pointed out that many debt funds are closed ended and have finite resources. ‘They could be an accelerant at the wrong moment if refinancing (needs to be) done at the wrong time.’

The report says that rather than having to seek a lender prepared to re-value and refinance at new market terms, borrowers may be able to agree extensions or standstills. However, it notes ‘some of these loans for example for shopping centres are already in loan extensions.’

The report was based on responses from 75 lenders holding £180 bn of secured loans on their books, £205 bn including undrawn development facilities of £25 bn.


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