Lending in a lockdown:

As we are being told so often at present, we are in ‘uncharted territory’ both for the health of the nation and also the economy. Normal rules of consumer behaviour, macroeconomics, finance and banking have been suspended as markets, governments and financial institutions try to get to grips with what is, at best, a severe economic shock and at worst, the start of a sustained period of a normality that is vastly different from any that most major Western economies have faced in over 70 years. In such an environment, with such uncertainty, and with so much general fear, it would be unsurprising if the whole market ground to a halt. Indeed, early empirical evidence at this stage is showing that there are signs of a general market slowdown that was already in place before Covid-19 became such an issue in Europe. Added to this the possibility of loan covenant breaches as the value of real estate declines as a result of pure uncertainty, issues of liquidity trap associated with interest rates that are at 0.1% as I write, huge sectors within real estate (leisure and hospitality, retail etc) that have almost no income at this time (and hence no capacity for debt serviceability) and the picture looks pretty grim. Who would want to lend in such an environment and, indeed, who would be foolish enough to want to borrow or leverage themselves up for any purpose at present?

On the other hand…

There is some ready made evidence to suggest that, whilst uncharted, the situation is most likely to be finite. If we take China as the model, the (significant) restrictions that have been in place for them resulting from Covid-19 lasted for 12 weeks. Most of China is now back at work and furthermore, are now aggressively targeting new deals in energy and infrastructure. Assuming that the modelling extrapolates to Europe therefore, it is to be hoped that the restrictions will last for 12 weeks here. Furthermore, there is significant evidence (mostly from wartime economies or those that have recently experienced a significant natural disaster, for example) that recovery from such disruption, provided it is relatively temporary, tends to be very strong. People miss bars and movies, football, restaurants and buying new clothes for nights out a lot when they cant have them and as such will come flooding back as soon as the restrictions are eased. More practically, most typical development or project finance pieces will take a minimum of 12 weeks from inception to drawdown. As such, any deal that is started now should be in line for completion just around the time that the restrictions are eased so that demand comes back to the marketplace.

There is still liquidity in the market, particularly in the alternative lender space that is under pressure to be deployed as the funders themselves have to avoid the standing facility fees that their credit lines will be under and finally, there are undoubtedly going to be some good deals in the marketplace for anyone with enough courage and nous to take them on at this stage of the game. When you combine this with the fact that both lenders and also consulting project finance agencies such as ourselves are going to be flexible on fees at this time, there is the potential to make an attractive package for anyone that is prepared to take the plunge at this time. Indeed, governments around the world taking the sort of stimulus measures that they are at present gives rise to the possibility that in 12-16 weeks time as restrictions are eased, Europe and North America may be awash with cash, backed with historically low interest rates that Central Banks will be reluctant to raise. In such an environment, combined with the release of pent up demand you would expect the world to unleash a frenzy of real estate activity, particularly if government support through the period ensures that commercial infrastructure (shops, bars, restaurants, hotels, airlines etc) remains intact.

Our message therefore is that all is not as gloomy as it seems. Over this period, projects will be funded, some on extremely competitive terms, taking advantage of the uncertainty and delivering highly successful businesses as a result. In other words… If you have the courage, you can get the cash!