Real estate debt financing during COVID-19

Oliver Haunch Oliver Haunch

The current circumstances are challenging for UK business, particularly for real estate debt financing. Oliver Haunch offers advice for businesses and landlords facing short-term liquidity concerns.

The impact of COVID-19 is presenting many businesses and sectors with particular challenges regarding real estate debt financing. We’ve seen an increase in the number of corporate clients coming to us for help, and also lenders looking for advice on lending decisions.

There are two measures within The Coronavirus Act 2020 that could have significant liquidity implications:

1 Landlords are now precluded from forfeiture until later this year, with extensions to the current deadline possible

2 Wrongful trading provisions as determined by the 1986 Insolvency Act are to be temporarily suspended

When combined, these measures could have a material impact for real estate debt financing. We’re, therefore, talking to clients about how best to maintain liquidity and move beyond this challenging period.

Temporary suspension of wrongful trading provisions

Normally, one of the critical tests for insolvency is when a company is unable to pay its bills as and when they fall due. In such circumstances, directors are expected to act in the best interests of creditors and not shareholders.

However, to help businesses continue trading during the current situation, this key provision is being relaxed. Company directors now have license to be more selective and pay those items that are critical to their ongoing trading first to protect their core business.

For landlords, the implication is that rent is no longer likely to be considered a priority payment for businesses. This could present its own real estate debt financing issues, particularly for those landlords exposed to the retail, hospitality and leisure sectors.

Practical steps for real estate debt financing

There’s clearly great uncertainty as to how long current provisions put in place through the Coronavirus Act will last. But there are four pro-active steps that you can take right now to deal with real estate debt financing issues or potential covenant breaches:

1 Scenario-planning and stress-testing

Forecast short-term cash receipts and payments over different time periods to get a sense of what future cashflow and covenant testing could look like. Extrapolate current run-rates and consider a range of scenarios. Be sure to include mitigating actions and self-help measures.

2 Comply with covenant documentation

Be fully aware of covenant reporting requirements, especially in advance of a likely breach.

3 Engage with lenders directly

It’s never too early to contact lenders to keep them informed of your situation. We’ve noted lenders acting reasonably and flexibly to help businesses that have approached them in advance.

4 Find new capital or consider temporary real estate debt financing options

This could be an opportunity to obtain new money from third-party lenders looking to expand their books. Be mindful that any new relationship may take longer for cash to arrive. Make use of any available temporary finance options or asset-specific finance.

Is government support filtering through?

Finally, it’s important to note that the government has introduced emergency measures to help support real estate debt financing. Lenders were not initially given much guidance regarding loan-facility implementation and, as such, lenders have been inconsistent in their approach to date, but things are improving.

It’s also worth noting that government support was not designed to protect businesses already in distress or experiencing financial difficulties before COVID-19. While lenders initially took a hard stance on such businesses seeking additional financing, especially those already within the business support function of lenders, we have noticed this stance softening. Many lenders are now revising their attitudes towards business viability and making additional financing available. In some instances, the lender requires an independent view of forecasts, which may include a view on viability for the business regardless of COVID-19. We expect more lenders will come to us asking for advice in this area.

For support with real estate debt financing during the current situation, contact Oliver Haunch.

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