The corporate debt market is showing signs of stress, experts agreed at Real Asset Media’s Trends 2023: European Debt, Finance & Investment briefing, which was held in Frankfurt recently.
The corporate real estate debt market in Europe is around €250 billion, which is between three and five times what it was four or five years ago.
“This market has ballooned in size and it’s amazing that a lot of the public companies and some of the private ones have grown so massively off the back of this market alone,” said Anders Hemmingsen, managing director, European investment team, Strategic Value Partners. “It was a great business for a long time but now the tide’s gone out and these companies have serious problems, even the high quality companies like Vonovia, because the LTVs are just too high.”
The only levers they have is selling assets – which they don’t want to do because of current valuations – or raising equity, which would be dilutive.
“Another lever they have is for banks to pick up the slack, but there’s a question mark whether banks want to refinance maturities in this market because there’ll be a wall of them over the next two to three years,” said Hemmingsen.
But the problem has already begun according to Mike Danielewsky, partner, Bryan Cave Leighton Paisner.“If you’re looking at the refinancing requirements of corporate bonds in the real estate market, it is an issue and if it’s not solved it will be a massive wave”.
The underlying issue is dislocation in the market and the uncertainty over valuations.
“The real money community just doesn’t want to touch real estate right now, because they don’t have the wherewithal to figure out the underlying value,” said Hemmingsen. “They call their trading desks and say ‘anything but real estate’. Sentiment has turned very quickly away from the sector in the public markets.”
As companies need to reduce their leverage and sort out the maturities there will be a handful of restructurings in the public sector but inevitably some insolvencies as well.
“There’ll be quite a bit of pain to flush through the system before the market normalises,” said Hemmingsen. “It will normalise eventually but not for another three to four years.”