A huge amount of commercial property debt will be coming due within the next three to five years. Many of those loans were issued in an environment where both loan-to-value ratios and property values were higher than today. The growth of the economy is expected to be rather slow in many markets during coming years. Rents may still fall and the vacancy rates may rice. Consequently, many loan agreements will be in breach of one or more of its covenants and the property values will not recover that much in the next few years. Refinancing of those loans will, hence, be difficult. Some international banks have decided to withdraw from the Nordic market. This might make the refinancing of local property portfolios even more challenging.

Assuming a slow economic recovery and taking into account the huge amount of loans that shall be refinanced, it seems likely that the banks do not want to use foreclosures as an instrument to settle the situation for many of the property portfolios facing financial problems. The foreclosures would most likely only realize losses for everyone involved and would further deteriorate the property finance market.

What other solutions could be available? We will see different kinds of restructurings of the property portfolios, restructuring of the financing by replacing part of the senior loans by new equity, mezzanine and profit participation loan instruments. No major amount of new equity is, however, likely to come into these structures from new investors. Assuming that the current equity investors do not have the capacity to substantially increase their investments, the senior lenders will play a major role in restructuring the current financing. Key drivers for financial restructurings would, hence, be dependent on the senior lenders´ need to decrease their exposure on current property financing and get healthier loan-to-value ratios for current lending in order to be able to use their balance sheet and equity efficiently for new financing opportunities.

 We will most likely see new property funds and other SPV-structures taking care of distressed portfolios and financing. We might also face new players buying the current loans giving the lenders a better capacity to expand on new businesses. Whatever the solutions will be, the property and finance market will certainly need new and creative structures and players. This gives us the opportunity to assist our clients in adding value to their business.