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COVID:19: What does the future hold for the secured lending market?

In the current lending market, many businesses are under extreme time pressure to refinance existing facilities, complete on purchases committed to before COVID-19, or secure development financing.  A big proportion of these businesses are now Read more...

In the current lending market, many businesses are under extreme time pressure to refinance existing facilities, complete on purchases committed to before COVID-19, or secure development financing. 

A big proportion of these businesses are now finding that their trusted banks are either taking a more precautious approach by reducing Loan-to-Value (LTV) ratios and/or the pre-agreed loan amounts, or stepping away from transactions entirely. This leaves businesses at risk of defaulting on their existing loan terms, and worse yet, secured properties being repossessed and guarantees called in; forfeiting deposits or halting developments altogether for the foreseeable future.

Arguably, one positive impact of the lockdown is that businesses in various sectors are adapting and demonstrating their entrepreneurial spirit. For example, Foxtons, a publically owned UK real estate company, are offering potential buyers and renters virtual tours of properties. As for other businesses, most local newsagents are providing delivery services. Restaurants have shifted to take-away services. Fitness and wellness trainers are keeping clients fit from the comfort of their homes. However, on the other end of the spectrum, many businesses have already collapsed and/or have been unable to adapt as quickly as others.  

TO BE, OR NOT TO BE, THAT IS THE QUESTION 

What about the lending market? Will COVID-19 eclipse it entirely? Or will lending institutions get creative or, in legal parlance, “take a view” to stay on top? 

There are at least two possible approaches that alternative debt providers can take – they can adopt a conservative stance or go-get those deals themselves. For the purposes of this article, alternative debt providers will be referred to as “lenders” throughout. This includes challenger banks, family offices and bridging lenders. 

The remainder of this article concentrates on the current impediments facing the secured lending market and provides possible suggestions as to how lending institutions could adapt their approach to help facilitate new deals.  

THE CONSERVATIVE APPROACH 

The conservative approach entails sitting tight and weathering out the storm. This may be the more prudent course of action, or perhaps lack of action for some, for the risk-averse institutions who have carried out stringent stress tests to determine whether their existing portfolios can withstand the impacts of a global economic crisis. Generally speaking, this means that they will not accept any new applications across their product ranges and instead look to support existing customers either by extending loans that are maturing or amending capital and/or interest payment terms. 

To name a few, both Together Financial and Vida Homeloans are taking this conservative approach by concentrating on existing customers. Indeed, several lenders are also rolling out emergency working capital loans to existing customers in an attempt to keep them afloat and covenant compliant. These loans will keep them very busy for the time being. 

Hopefully, business for those adopting the conservative approach will return to normal only once the continuing threat of COVID-19 has been averted. 

THE GO-GETTING APPROACH AS AN ALTERNATIVE 

Some lending institutions may simply have to take a view. The go-getting approach’s central premise is, or will most definitely have to be, that the economy and property market will eventually restore themselves, and business as we know it will resume as usual. When it does, the go-getters will have cherry-picked the best of those deals and potentially secured relationships with new (and existing) borrowers for the years to come. The belief must be that borrowers will remember those lenders who stood by them when the going got tough, and hopefully this bond, once established, will endure. Likewise, those lenders who desert their borrowers in their hour of need may find that the damage to their reputation will make it harder to place new business in the future.

VALUATIONS

The real hurdle slowing down the secured lending market is valuations. Given the current lockdown measures, valuers are unable to physically attend sites for inspection whilst they also may not be comfortable with providing definitive opinions on market values and market rents. One potential way forward is to rely on desktop valuations. Desktop valuations are valuations that are carried out with limited or indirectly sourced information using online data and map services like Google Street View. Arnold and Baldwin explain it this way- “essentially this means that, in qualifying circumstances, our experts are able to arrive at a reasonable opinion of value from their desk.” Pure Retirement, an equity release lender, are now using desktop valuations for a number of their products. 

Desktop valuations are of course not foolproof and may not be suitable for every transaction, especially those involving more complex commercial properties. However, desktop valuations could be a viable solution for at least some deals, thereby allowing the property market to continue functioning. 

BROKERS

If you are a potential borrower and have exhausted all your commercial financing or refinancing options, now is the time to speak to brokerage firms as they may help you secure new deals using their extensive connections. 

Samuel Kalms, founder of KP Finance, a brokerage firm delivering bespoke real estate funding solutions across all assets in the UK commented: “on the funding side, the alternative lenders still have appetite and seem to have flexibility and eagerness to lend and as such have tried to adapt to the market.” 

CONCLUSION

To conclude, Adam Smith once said: “to widen the market and to narrow the competition, is always the interest of the dealers…” It seems now may be the prime opportunity for many alternative debt providers to snatch up deals which ordinarily they wouldn’t have a chance to consider. 

For the foresighted lenders, helping struggling businesses by providing much-needed funding solutions at this critical time could result in their efforts being recognised and compensated in due course by distressed borrowers, thereby securing their prospects of winning new work in the months and years to come. 

For a free no-obligation chat on how we can help your business right now, please feel free to get in touch with me using my contact details below.  

Milana Katz, Solicitor, Real Estate, Secured Lending and Banking.