Temporary waivers loan-to-value breaches on the rise

A growing number of banks are offering temporary waivers on breaches of loan-to-value covenants, according to Peter Kasch, managing partner of fund manager Catalyst Capital. 'They may ask for additional equity or fees, but most banks are fundamentally cooperative,' he said during an interview at Mipim, the annual real estate fair that got under way in Cannes on Tuesday.

Kasch pointed out that a significant number of property companies are in technical violation of their covenants at present due to current market conditions. 'The highly leveraged deals are completely under water, but even loans with a 50% loan-to-value ratio may need to negotiate a restructuring.'

The term of the waiver is in most cases two to three years, he added. 'The banks are not reviewing loans on a quarter-by-quarter basis. Nobody thinks this downturn will be over quickly.' In recent months Catalyst Capital has renegotiated terms for its entire loan portfolio comprising a total of 12 assets. Kasch: 'We try to be upfront about things and work something out. The banks appreciate transparency.'

Most banks are loathe to crystallise their losses on property loans or take them on their balance sheets, he added. 'Some banks are starting to talk to third parties about a type of joint venture with the bank in which they inject new equity into a loan and take over the asset management, particularly in cases where the existing borrower doesn't have the funds or skills to operate the asset.'

Catalyst Capital manages assets of EUR 1.2 bn and invests on behalf of European and North American pension funds and endowments. The firm has two funds: the Catalyst European Property Fund and the Catalyst Samsara India Opportunity Fund, which is fully invested in roughly $700 mln of assets and managed in joint venture with Samsara Capital of Mumbai.