Reed SMITH's FINANCIAL INDUSTRY GROUP
Georgia Quenby is a Partner of international law firm Reed Smith's Financial Industry Group. Georgia specialises in restructuring, refinancing, distressed debt portfolio purchases, funding turnarounds and acquisitions as well as asset-based lending and mezzanine finance. She has particular experience in the retail, manufacturing, automotive, insurance and real estate sectors. Georgia has experience acting for all classes of investors including hedge funds, asset managers, quasi-PE funds and the investee companies themselves.
James Thomlinson: Georgia you work with a wide range of lenders and investors and offer a wide spectrum of expertise. Which areas of the market place do you find yourself busiest in during 2010 and to what extent do you see this changing in to 2011.
Georgia Quenby: Thanks James. I think that in 2010 our team worked on quite a few investment loans for German banks but at the prime end of the market, the performing end of the market. We did see one high street lender picking up some slightly secondary property but from our perspective they were unusual in that respect. We didn't see much development activity from the lenders as you will probably know. The lenders we have been working with have been broadly quite shy of advancing further funds to developments that are in progress. Equity fundraising from our perspective in the real estate sector was really down and I would say pretty much non-existent or unsuccessful outside of blue-chip, REIT-filled, asset managers. So, we saw more activity for smaller property managers; people taking over existing portfolios or single asset mandates; people doing joint ventures with funds or high-net worth investors to acquire properties or acquire distressed assets and portfolios from basically next to nothing from existing owners who were unwilling to put any new money in. We also saw situations where lenders an extent ran out of patience with some owners, and that's where we saw properties being pushed on to the market. We saw good managers looking at secondary assets. Everyone was trying to find off-market deals to try and squeeze some value out. In the first half of 2010 we also saw non-UK based investors paying quite high prices for prime assets. Although I think there was probably a foreign exchange play for some of those investors looking at sterling which was quite weak in the first half to 2010.
To what extend do I see this changing in 2011? I think we'll still see cautious lenders and sensible LTVs; the straightforward deals are still going to happen. I think the other thing that we expect to see is the banks pushing more of their distressed portfolios or single assets out into the market as they slowly start to repress their balance sheets. I think they have been reluctant to do it so far and we didn't see as much in 2010 as we had predicted at the start of it. So, yes we should start to see more of that in 2011. I just think we are just starting to but it takes time.
JT: How much willingness do you observe in lenders to attempt to restructure or 'work out' distressed loans before they reach receivership/administration?
GQ: We have seen a huge amount of willingness from lenders to try work out loans or restructure them. I think that the banks have been very cautious about their reputations in the market and so I think that the banks have for two reasons. One: for reputational reasons. And the other, for capital reserving requirements, have been keen to keep as many loans as possible sitting on the performing side of their balance sheet. I think there has been a lot of 'extend and pretend': people who have, provided they can show an asset in their books as performing, they have probably pushed the boundaries quite a lot in terms of what constitutes performing. Providing there is still some interest being paid then I think that the banks have been quite keen to try to work out the debt positions and have been quite keen to assist in refinancing. Broadly, some lenders are more aggressive than that. But also the hedge funds/sovereign wealth funds/private equity funds who have been looking at the UK property market have tried to put properties into side pockets where they don't necessarily have to show a cash income on a regular basis (so they have used those side pockets wherever they can rather than crystallising the loses). The funds who have run out of side pockets are the ones who have had to be a bit more aggressive in terms of pushing to a 'work out'. Having said that I think those funds are less familiar with a receivership process or an administration process. Particularly the ones that have a US ownership element are much more accustomed to a negotiated solution.
Regarding the banks who we see appointing a receiver or administrators, actually not in your question but I think relevant, it's how long it's actually taking to sell properties out of receivership. I think that even once the banks have put receivers in it's taking a very long time to find buyers for those properties. You're talking well over a year. A lot of administrations are having to be extended because the purpose of the administration was to sell (a portfolio of small hotels/golf courses/holiday homes) but there haven't been buyers. So these administrations have had to be extended beyond the statutory one year to try to give them further time to realise the assets. It's been very difficult.
JT: Voltaire Financial offer funding solutions for purchasers of distressed debt portfolios. How much purchaser appetite do you see going forward for debt to facilitate such transactions versus the cash only structures that have been so abundant over the last two years?
GQ: We have seen distressed assets come to market and be funded and bought for cash in the last year or so. Purchasers are still keen to get their hands on those assets and the banks are still working them out with borrowers. I think we expect to continue to see the refinancing of assets that have been bought for cash but also an increase the amount of assets bought with debt. So I think we do see greater appetite for debt than there has been in last couple of years. If it's a truly distressed scenario, where you've got a negative equity situation for example, we are really seeing purchasers trying to agree refinancing with the seller's existing banks. Where there is some equity in the asset we have seen purchasers tending to use the banks with whom they have the best relationship even if they aren't offering the best financial terms. Certainty of reaching financial close probably attracts a premium in our view and so in the debt market we expect to see that strength of relationship being very important.
JT: Legislation the finance bill 2010 will add a new rate of 5% for transactions in residential properties (on or after 6 April 2011) where the consideration for the transaction exceeds £1 million. How do you see this legislation affecting the prime and super prime residential markets?
GQ: We think it won't affect the super prime very much at all and probably even prime because it's really just an additional 1% on where people are now and as an additional cost incrementally it's not that much. I think that where it will have the greatest impact is around that million pound threshold. I think it will probably depress prices that might have been somewhere over one million pounds - but not very much - to just below and obviously people pay more for furniture and things like that to try and stay under their threshold of one million pounds. But most of the purchasers that we have seen for super prime and prime properties are "non-doms"; wealthy investors for whom that 1% is not actually a significant deterrent to doing a transaction.
In addition, we wanted to de-risk the reliance of the business on the UK market and offer the same service internationally that we provide in the UK.
JT: Voltaire Financial remain positive about the outlook for the UK commercial property sector in 2011. How do you see the year developing?
GQ: We in the office had quite a detailed and lively debate about the commercial property market in 2011 and it's fair to say that opinion is divided among us. I would say half the team are cautiously optimistic that things will carry on this year; that people have priced in an interest rate rise in the second half of this year. And I think that the derivative market is to a degree pricing in a rate rise during the second half of this year. But the other half of the team, and I probably come down with the other half of the team on this, remain concerned about the wider macro-economic position. I think we remain concerned about what is going to happen to the Portuguese and Spanish banks. I think that another Eurozone bank bail-out would probably have a dampening effect on UK commercial property: and in fact the UK market in general. So, it's a bit hard to project forward and say what the consequences would be but a lot of the funds that we work with are looking, as I'm sure you are, at the potential adverse impact of a collapse of a major Spanish savings bank or a further Eurozone crisis. So, 50:50 between cautiously optimistic and 'what if something bad happens outside of Ireland?'