Lenders face decisions over post-pandemic restructuring

Many assets will require capital to reposition amid falling values, says Angelo Gordon’s Anuj Mittal.

Government stimulus has allayed many of the initial fears about the effects of the pandemic and the lockdowns that were introduced to resist it. But when central governments reduce their support for economies those fears could be justified as instances of distress increase, according to Angelo Gordon’s head of Europe real estate, Anuj Mittal.

In a one-on-one conversation with CMS head of real estate Ciaran Carvalho on the REALX.Global platform, Mittal explained why there has not yet been a higher incidence of distressed loans.

Part of the reason is government support intended to stimulate economies. “Another significant factor is that lenders aren’t sure if they want to be sellers or if they want to be holders of these assets,” Mittal said. 

In many cases they have learned from the global financial crisis of 2007-2008. “A lot of lenders looked at the GFC and saw that the groups able to buy debt and restructure assets did pretty well. They don’t necessarily want to be handing profits to some of those debt restructuring shops.” 

Difficult decisions

However, he added that many lenders will be forced to make difficult decisions “as a result of values not being in a place where a borrower can refinance, or where a borrower doesn’t have the capital to reposition an asset”.

Many assets “just need to be rethought” he said. “Whether it’s an office building, certainly if it’s retail, even logistics and industrial. There are different types of users that are pursuing these assets and all of those changes require capital. Not every borrower is in a position where they have that capital, let alone the expertise or the patience to pursue it. I do expect that there will be restructuring.”

The property that Angelo Gordon has been able to buy so far still requires a fair amount of capital restructuring, he said. It has often been acquired from a seller with a fund that was coming to the end of its life, or was a joint venture that was in some form of disagreement or complicated ownership.

“We still find that we’re using our skill set of fixing the structure of an asset, not the physical structure, but the ownership or the financial structure.” 

‘Many assets just need to be rethought. Whether it’s an office building, certainly if it’s retail, even logistics and industrial. There are different types of users that are pursuing these assets and all of those changes require capital.’

Anuj Mittal, Angelo Gordon

The current crisis is not a replay of the global financial crisis. But the lending community is beginning to feel pressure from both governments and central banks. “Also, internally, a lot of the boards of these banks have decided they need to start taking reserves, maybe they need to get out of certain businesses, maybe they need to support the borrowers that really are cornerstone borrowers. They’re making decisions to pull out of markets, pull out of certain types of lending and maybe support only specific types of borrowers.”

Mittal said this would reduce debt capacity and availability in the future. 

After the GFC there was concern that substantial government stimulus would push yields up and increase borrowing spreads for governments. That did not happen so, in the wake of the current crisis, the same central banks thought stimulus could be used again without pushing rates up. “We are now seeing rates rising and you’re seeing it in the US more than anywhere else,” said Mittal.

“What does that mean? It might mean that we were wrong after the GFC and unlimited stimulus does have a consequence and it does require a higher borrowing rate for someone to take on all that debt. 

Inflation on the horizon?

“It could also mean that the world is starting to look at inflation, they’re starting to believe that all of this money will create inflation and therefore there’s a higher opportunity cost for that debt.”

However, as long as inflation leads to rental growth it is a good thing. “Inflation means that the economy is moving and there are more jobs being created. More jobs means more physical space required and more physical space need means rents go up.” 

Furthermore, if there is rental growth, cap rates could be compressed. “People will pay more for an asset knowing that they can underwrite real rental growth.” 

That is the key. Is there going to be rental growth? Mittal said there are certain asset classes for which rental growth seems more obvious, such as residential, logistics and life sciences or sectors where structural headwinds create an uplift.

“I think there will be rental growth for the right offices in the right locations. Retail is more challenged. Overall, I think this reinflation of the economy is a good thing for real estate,” he said.