Resource | Loan Management Best Practices (EMEA)

This guide, drafted by our EMEA office, highlights issues lenders should be mindful of as we approach the next cycle of Interest Payment Dates. Please contact dharris@trimontrea.com or probinson@trimontrea.com with any questions, comments or concerns regarding these best practices.

Commercial Real Estate (investment):

• Confirm which of the borrower’s properties are open and operating (check whether reservation of rights notices need to be issued if any properties are closed);
• Review property insurance coverage as well as any properties that are closed/unoccupied (check whether this has any impact on the collection of service charge);
• Obtain weekly updates from the borrower and/or their property manager on the status of their collections account, including a transaction summary and a breakdown of how current collection compares to previous quarters;
• Obtain a current tenancy schedule including a detailed arrears tab (and tenant “watch” list for any tenants who have indicated hardship or requested forbearance);
• Obtain a weekly summary of the borrower’s communication with tenants who are in arrears regarding the tenant’s payment intentions and the borrower’s planned response;
• Undertake an analysis on each tenant (in order of priority), to understand their financial strength; cash position; sector and geographical exposure and how their business might be impacted by COVID-19 (and what plans they have in place);
• Review all lease documents to check whether tenants have grace periods for rent payments. Check whether any rent deposits/guarantors exist (also check whether the lease is subject to an authorised guarantee agreement);
• Request updated guarantor financials (as applicable);
• Review all finance documents to understand what cash trap/sweep provisions are in place;
• Review the last four “payment waterfalls” to understand how much surplus cash has been generated by the property/portfolio during these periods and how any surplus cash has been distributed (i.e. how much has been returned to the borrower);
• Obtain details of any reserve account balances (capex/interest etc.) – can any funds be re-allocated from any of these reserves;
• Request 2020 budget (if not already received);
• Request an updated budget, reflecting the borrower’s revised expectations in the current environment (and assuming a continued lockdown until 31^st May 2020);
• Apply sensitivity analysis to the borrower’s updated budget/forecast to identify potential issues during the remaining term of the loan. How far does income have to fall for there to be a breach; what is the break-even level (assuming that interest/hedging is covered but not capital repayments);
• Maintain regular (bi-weekly) contact with borrowers to ensure that covenant compliance/obligor financial reporting and property reporting is provided promptly, and by no later than the timeframe as stipulated in the finance documents;
• Ensure that all covenant calculations are checked within 48 hours of receipt and that the waterfall is not applied until the lender(s) have confirmed satisfaction with the underlying calculations;
• Review all “grace periods” in finance documents. Ensure that reservation of rights notices are issued where necessary (in relation to covenant breach or forbearance);
• For loans where there is a risk of breach/default, consider seeking a legal review of the security documents. Likewise, ask the borrower to share any legal advice that they have obtained;
• Ask borrowers to provide details of any governmental assistance that has been requested or provided, together with the terms and conditions linked to this assistance;
• Ask borrowers to share copies of any board minutes (for any obligor in the structure), including notification of any company appointments/resignations.

Specifically for Warehouse / Repo loans:

• Ensure that the underlying lender provides copies of all material correspondence that they have entered into with their respective borrowers (including any borrower requests for forbearance, irrespective of the underlying lender decision);
• Ensure that all underlying borrower reporting and payment waterfalls are shared promptly.

Specifically for Hotels:

• If the hotel is closed, check any underlying management/franchise agreements to ascertain whether this has any impact on these underlying agreements.

Specifically for Development Loans:

• If the site is closed, ask borrowers to provide bi-weekly updates on their meetings/conversations with their development teams (they should be able to review their programmes and identify areas where work can be advanced now while sites are closed, e.g. design, planning);
• Borrowers should be asked to provide bi-weekly copies of the records that they are maintaining (these will be critical in the event of any force majeure claims). Borrowers, PMs, and contractors/sub-contractors will need to document any reasons for delay and the specific teams impacted;
• Borrowers should be reviewing their entire supply chains and providing a schedule showing what is currently on-site, in the country, in transit, in production, and ordered but not yet in production:
  • Where supplies have not yet been sourced/procured, contractors should be able to advise where alternatives may be available;
  • If supplies have been procured but they cannot be moved to site/into the country due to port closures, borrowers and contractors should be able to advise whether alternative routes/ports could be used;
  • Borrowers/contractors need to review exposure to any key sub-contractors and what impact the failure of any sub-contractors will have on the development;
  • Borrowers should consider the merits of settling invoices with key sub-contractors directly.
• Contractors should also be asked to provide their re-mobilisation strategy and timeframe to get workers back on site (assuming a lockdown until 31^st May);
• Borrowers and contractors need to ensure sites continue to remain secure while closed, health and safety standards need to be maintained;
• Consider whether milestones need to be extended as construction delays occur due to a lack of available workers, a breakdown in the supply chain of raw materials and a shutdown of planning/heritage departments;
• Consider whether any community infrastructure levy payments will fall due during the next six months and the impact of non-payment of these payments;
• Lenders need to review financial documents and issue Reservation of Rights notices where appropriate if development sites are closed;
• Lenders need to consider the legal and financial implications for any pre-lets (longstop dates/tenant financials etc.);
• Lenders need to be aware of any upcoming/scheduled sales and ensure that any sales receipts are received into controlled accounts;
• Lenders should consider whether projected financial costs can be re-calculated (some borrowers and lenders should also consider the merits of tearing up their existing cap agreements and entering into new hedging agreements, which may potentially reduce forecasted finance costs, with the possibility that some of these “savings” can then be re-allocated across the loan).