Following the rapid decline in the UK property sector from 2008, and the related negative effect on the balance sheets of the institutional bank lenders, there continues to be a sustained policy with many bank lenders to off load long term property debt where there is a view that there has been an over exposure on Loan to Value advances given the realignment of property values over the last five years or so, and where such loans also generate low margin base rate linked margins.
Further to this, the banks’ requirement to repair their balance sheets has been hastened by the Basel Committee on Banking Supervision’s imposition of tougher Lending Coverage Ratios, which has presented a demand for lending institutions to convert parts of their existing loan book debt into cash.
As a consequence, rather than merely renewing or renegotiating existing customers facilities, lending banks are targeting significant reductions in their property loan book exposure, resulting in borrowers being offered ‘one-off-never-to-be-repeated’ heavily discounted settlement opportunities in order for them to make full repayment and in turn increase the bank’s cash liquidity.
Invariably, the provisioning for bad and doubtful debts has already been dealt with in prior year accounting, therefore these extremely generous redemption incentives that can be secured will not result in new losses to the bank.
Bridgebank Capital are seeing an increasing number of these debt forgiveness settlements being secured by experienced property professionals, including those who have conducted their account in an exemplary manner without default. In these cases, where borrowers are able to secure a material discount from their original debt, there may be opportunity for further investment to be made, as a result of a reduced level of debt.
Whilst in many cases, borrowers are able to secure a debt forgiveness settlement having come to the end of their term agreement, there are a number of cases where borrowers are being faced with demands for repayment during the course of their loan term. In many of these cases, borrowers are deemed to be in breach of the terms of their loan agreement, as a result of revised loan to value ratios following revaluation. In such cases, a debt forgiveness settlement may be offered to the borrower, therefore allowing them to secure alternative finance, whilst benefiting from a discounted settlement.
Bridgebank Capital has supported a number of borrowers with the funding required to complete their debt forgiveness settlement. The use of bridging finance in this scenario has provided borrowers with the flexibility to finalise the settlement whilst also providing the time required to identify an alternative term lender for the loan.
In conclusion, borrowers should be mindful of the opportunities that may currently be available to them in the form of debt forgiveness. Not only are lenders in a position where they are required to increase their cash liquidity, they may also be seeking an exit from the market place. Bridging finance can be utilised to assist in achieving repayment deadlines where a discounted settlement is available. The term of the bridging finance agreement can then be used to identify an alternative lender who is active in the property sector.
Steve Woods is head of sales at Bridgebank Capital