Loan Workout Rumors
I have heard of workouts happening but they all tend to be equity injections to pay down the loans in return for loan extensions. Is anyone hearing anything different?
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I work in workouts.
Delaying DSCR test is an example of non equity injection. However, a pay down is always preferred (for obvious reasons).
Are those the two options?
Anything else?
Principal reductions?
Interest reductions?
Forbearance?
Are lenders putting loans in default and default interest rates for missing dscr requirements or other technical defaults
Are they defaulting them for missing balloon payments?
My response did not post for some reason, but I will give it another shot...
Nope, there are unlimited options which makes the job creative and "fun" as you hope to make both parties happy... the longer rates stay high the less likely that both parties leave happy unfortunately.
I have not seen a principal reduction on the legal balance of a loan - only the internal book value. It does not really make sense to me why a lender would offer this. If you go to court, would you rather sue for $50MM or for $48MM?
Interest spread reduction could be an option. Would not say it is super common, would definitely need something in return. (cross loans, guaranty, etc)
Forbearance is an option for very troubled loans. Not a good scenario.
There are a variety of lenders ranging from banks that will extend & not pursue anything to loan sharks who will give you ROR & notice of foreclosure as soon as they possibly can. I think the average lender will not give you the default rate / default immediately after missing a DSCR requirement (cash flow sweep will still happen) as long as the property is performing well but you better make the next covenant test. It is easier to work with a happy Borrower than one who does not like you. Also, there are bigger maturity default issues that will require more attention/negotiations.
If you miss a balloon payment, you may get a short-term extension to "secure financing" but the lender will probably ask for a paydown or something similar. Aside from that, interest / amo will still accrue and the default rate will get slapped on.
The best advice that I have is to have solid communication with the lender and to not own a class B/C office.
I get that the options are endless but are you seeing modifications get done that are anything other than extensions and looking the other way on technical defaults?
There is a vast difference between what a lender can do and what it is willing to do.
Lenders lend because they wants to be in a last loss position, so I am not saying they should necessarily do anything. It is just a question of how they want to deal with the issues.
I personally have not heard of anything getting done that was not a partial loan pay down in exchange for an extension, but other people may have seen other things happen and that is what I am asking. Even not hitting the borrowers for technical defaults is not a modification unless they actually modify the loan docs.
why is this the case? when does forbearance happen/negotiated in the process? is this not something you advice doing?
Why do you have to pay the balloon payment? does the lender refinance the loan here? can you explain pls.
Borrowers are being foreclosed on. Some of them are negotiating deals with lenders. It’s all over the map. 100% seeing firms lose buildings.
It was interesting to see that newer multifamily deal in Houston go into foreclosure.
Houston has had a number of high profile foreclosures but most have been on older assets.
We’ve negotiated some IO periods in exchange for a fee. Would obviously prefer principal repayment sooner rather than later, but also don’t want the keys mailed to us.
Most variable rate loans are already interest only. What type of loan is that on?
Thanks for sharing!
We typically lend long term, fixed rate, somewhat comparable to what you’d see on agency product. We don’t typically structure IO periods outside of workout situations.
Unlimited options, but we aren't doing anything without some type of capital infusion by equity.
We don't want to own the property, but we have the capacity to handle it if we need to.
No reason for is to give anything away to help an equity owner unless we see a path out to being made whole.
So what options have you seen your company or other companies do if a group is willing to do an equity injection?
I 100% understand the lender trying to be made whole as soon as possible and I think cases that meaningful modifications are warranted are few and far between.
From a buyer’s perspective, I want the bandaid to be ripped off, but a lot of that depends on how lenders decide to deal with the problems.
Delay on complete rebalancing of interest reserves
Extensions
Upsizes to cover construction overages
Relief on DY tests
Relief on IRC terms
It really depends on the deal and the borrower.
Ok so I’m not in workouts but have been on the investor/operator side having breached multiple covenants for months on end.
Terms were restructured or we were allowed some time to get into good standing as the assets held value and were generally cash flowing sufficiently, which of course is somewhat subjective. Out of the times I’ve dealt with covenant breaches, only once was it serious enough that we thought we would lose the asset. We were able to refinance the debt via another lender of our choice within a deadline.
My firm has a decent AUM, has produced good returns, and our creditors have a positive view of us on a forward looking basis. All this to say is that if you are small, performed poorly in the past, and you own unfavorable assets, you may not have the same experience. However, the non-opportunistic/non-hard money lenders do not have a strategy of asset seizure at the first sign of blood. It’s a reputation risk to operate in this manner and negatively affects business in the long run.
People have long memories and and tides are guaranteed to shift at some point. Even some of the shark-y lenders want future business and may not elect to be as aggressive to every counterparty, I’ve dealt with one in particular that is a fairly familiar name that I think everyone would be surprised to hear was fairly pleasant.
So what kind of terms were restructured?
Lowering interest reserve and DSCR. There were others but for the sake anonymity, I am not comfortable sharing them as they are too specific.
If you are looking for comps in order to negotiate, it’s probably not the best use of your time unless you provide some level of detail on your asset class and firm. As mentioned by another poster, everything and anything should be on the table for negotiations. How a lender treats you is heavily dependent on your relationship, asset class, firm size, and performance.
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