What’s the outlook for the 2021 debt market?

How does the post-Covid environment compare to the GFC in 2007?

Lisa Attenborough: The 2008 credit crunch still feels very fresh in our minds. But it's actually because of the credit crunch that the debt market has been able to respond so well to the effects of the pandemic. Post-GFC, the rise of the debt funds meant that borrowers had a wider range of capital sources to tap into – at different leverage points and different price points. In addition to that, banks are currently much better capitalised (and protected) and that's because of the regulatory changes that came into play following the GFC.

This time around, lenders have demonstrated flexibility, and where possible, they've really tried to work with borrowers to avoid loan defaults where possible. This has been demonstrated by a range of things, but most notably by the provision of covenant testing holidays of up to 12 months, which has been welcomed.

Are there more or less restructuring requests from any particular lender type at the moment?

Marc Nardini: At the moment, there isn't that much distress in the marketplace. We certainly haven't seen the impacts coming through, and we don’t know what the market looks like, mainly because of the support in place. I think until that band-aid is ripped off, we won’t actually know the state of the marketplace. But lenders are taking this very seriously, they don't want to see distressed loans or loans in poor-performing positions. They really want to work with their customer base to try and either continue their performance, or bring them back into a performing position. Unfortunately, there are loans, and particularly areas of the property sector that this might not be possible for, and we will see an element of distress in those areas.

What's your outlook for 2021?

Lisa Attenborough: Sentiment is gradually improving, which has definitely been helped by the successful rollout of the vaccines and the fact that Brexit was concluded with a deal. In addition to that, transaction activity in 2020 was subdued (particularly during the summer months), which means that many lenders didn't hit their new loan origination targets last year. Many are now actively seeking new opportunities. They have fresh targets for 2021, and they need to hit them. However, we are seeing a flight to quality. Lenders have an appetite, but they're really keen to back the right sponsors, and the right transactions in the right sectors.

In 2020, we saw retail and hospitality lending dry up quite considerably. In the hospitality sector, however, we're now starting to see some green shoots of recovery, which is really positive. We've been contacted by a handful of debt funds over the last few weeks who buy into the long-term viability of the sector, and they are actively looking for opportunities in that space.

I believe the outlook for 2021 is one of cautious optimism. The markets responded well, and we have by no means experienced a widespread credit crunch.

Marc Nardini: There will be an element of watching and waiting, but also cautious preparation. Lenders are far better prepared, and far more resilient than they were post-GFC, and therefore, that gives us a good grounding for the future in terms of the debt market adding to the healthy environment of the property sector. A healthy debt market is key to the general thriving environment of the economy, but also the property market, in particular. With that in place, we do have a bright and prosperous future ahead of us, but it's going to be hard work that's required. Currently, what I'm seeing in the marketplace is lenders cautiously reviewing their loan portfolios and their appetite to risk.

What’s London’s debt market like at the moment?

Lisa Attenborough: When you talk about London loan originations, city offices and city office financings immediately spring to mind. While lenders are broadly positive about the London market, I guess the real question is whether the tenant and lease profile that they have previously taken comfort in is going to look the same as it did pre-pandemic. To answer that, I'd say we are looking at two large speculative office developments in the City at the moment, and we have seen significant lender appetite for each of those. That would suggest that debt providers are taking a long-term positive view on lending against City offices.

For more information please contact the Debt Advisory and Restructuring & Recovery team.