Banks not rigid on loan-to-value breaches - INREV

Banks may be willing to take a more understanding attitude to breaches of loan-to-value covenants by non-listed property funds, particularly in instances where the fund manager has a good track record and has maintained a pro-active relationship with the financier, according to the European Association of Non-Listed Real Estate Vehicles (INREV).

Andrea Carpenter, acting CEO of INREV, said banks generally agree that LTV breaches are largely 'meaningless' in the present environment of plummeting valuations.

Carpenter made the remarks in London last week during the presentation of the initial findings of INREV’s two-part project on debt financing of the non-listed fund sector.

The first part of the research involved talking to bankers in the UK, Germany, the Netherlands and the Nordic region. Phase two of the project will be a fund-level survey to identify the scope of existing debt problems and potential refinancing exposure. The completed study will be presented at INREV's annual conference in Athens on 24-25 April.

Carpenter said banks outlined several possible approaches in cases where non-listed funds were struggling with their loan terms. ‘Early repayment is seen as a nice thought, but is considered impossible,’ she said.

A more realistic option involves changing or extending the terms of agreement. This approach is helped by the declining cost of financing. Banks may also consider requesting more assets or cash to underpin the loan, and more rarely a debt-for-equity swap. The bank’s view of the management is an important consideration for such an arrangement. Carpenter said banks agree that the worst outcome is forced sales.

It emerged from the discussions that many bankers feel fund managers are sticking too closely to the rules and waiting for a call from their banks before acting to address financing problems. 'They are not being pro-active enough,' Carpenter said.

Fund managers with a good track record and an ongoing relationship with their bank are in a stronger position, the banks told INREV. By contrast, ‘shopping’ around by fund managers for the best loan terms was seen as ‘ part of the problem’ by banks.

Co-investment in a property fund by the fund manager is valued as a sign of 'alignment of interest'. 'Banks believe that co-investment by fund managers makes fund managers run faster,' Carpenter said.