COVID-19 and Hotel Loans

COVID has significantly impacted leisure and business travel and the hotel industry.  

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COVID-19 and Hotel Loans


COVID has significantly impacted leisure and business travel and the hotel industry.  Regardless if your expectations are that the crisis will lead to long-term changes to the industry or, alternatively, that there will an eventual return to the old normal, in the short to medium term the effects of COVID will be profound: travel has plummeted and most hotels are shut.


And while lenders to the hotel sector,  be they banks or loan investors, face a number of considerations common to other CRE loans, hotel loan portfolios require additional focus both because of their complex operational characteristics and the disproportionately severe impact that the crisis has had on the sector.


Defaults and Forbearance


At this stage most borrowers will be in default of one, or all, of their loan facility’s undertakings, financial covenants, and interest/principal payment terms.  Covenant waivers and temporary payment forbearance will be necessary and in the mutual interest of borrowers and lenders in almost every instance, and in some jurisdictions payment moratoriums have been legislated. While larger, complex, highly levered or already distressed situations will require detailed attention, lenders should establish high level waiver and forbearance guidance applicable across their hotel loan portfolios to facilitate and expedite implementing what will be a broadly portfolio wide “standstill” period.  At this stage we would expect most lenders will be in this explicit or de facto holding pattern across much of their book.


As lockdown and travel restrictions are lifted, travel will resume, hotels will seek to re-open and the industry will start to recover. Key to a successful recovery will be the combination of the desire, willingness, and ability of guests to venture forth again.  When this will happen and over what period is the big question, and the answer may not be the same for all hotel categories. This re-opening will, in due course, allow the timing and extent of the industry’s recovery to be better understood and future revenues, costs and cashflows to be more reliably projected, allowing new covenant and payment terms to be negotiated.


In some situations a more substantive financial restructuring than any currently implemented limited forbearance measures will be required, and inevitably lenders will find themselves the economic owners of a significant number of assets and businesses i.e. where existing equity has been wiped out and value breaks in the debt. Despite this, in most circumstances lenders should defer and, if possible, seek to minimize the number of situation where they onboard hotel assets, in particular where the existing legal owners and operators are adding value either through quality of management or provision of capital.


The benefit of delaying taking over assets, which would likely be a mistake in a more standard workout scenario, is that in this case it will be beneficial for lenders to see how individual properties, hotel sub-categories, locations and the overall travel market recover post-COVID.  For example, what were key success factors pre-COVID may prove less relevant going forward (e.g. will high occupancy rate targets be realistic), and the relative success of different operating models/segments will vary (e.g. the “stack’em high” budget vs. low density luxury categories).  The recommendation of minimizing, at least relative other real estate segments, the onboarding of hotel assets is a function of their complexity and operational nature, though in order to preserve value there will unavoidably be situations where some lenders will need to take ownership of properties. 


Therefore, on the decision tree of how lenders should manage their hotel loan portfolio, segmentation and triage will be an iterative rather than one-off process, and a measure of “planned procrastination” will be beneficial in making more informed decisions. However there is unfortunately a branch on the decision tree that will come up quicker on some transactions than would ideally be the case: new money.


Working Capital and New Money


Regardless of the situation lenders find themselves in - debtholders to a temporarily distressed but viable borrower, creditors with economic ownership, or actual legal owners of enforced assets - they will shortly be presented with the challenges and issues associated with reopening hotel properties, which in many instances will require funding.  Working capital is a key issue across the sector as even when closed, and almost certainly on reopening, hotels will need to fund expenses while generating little if any revenue. Many governments have made available support to businesses including employee furlough schemes, tax deferrals and holidays, and government guaranteed loans (in passing  the interaction of the latter with existing credit facilities should be analysed and understood from both a legal and commercial perspective). Lenders will nevertheless need to consider requests to allow access to revolving credit facilities and overdrafts and/or to provide new money facilities to support hotel businesses through to recovery.


The challenge is that these decisions will need to be made when it is hard to gauge the long term viability of some properties, with the uncertainty of how COVID might permanently change the industry adding to the usual difficulties of undertaking projections in a distressed situation.


Open or mothball?


For marginal situations the critical decision therefore is when is it going to be viable to re-open in a manner that is value accretive, or is better to keep the property mothballed for a period, potentially using the time to make needed changes to the property and re-opening when it is more feasible? This is a question of not only expected occupancy and room rates, but also the operating costs and requirements in the post-COVID operating environment.  What is the new break-even point, and how does that compare to the cost of mothballing a property for an extended period? 


To answer these questions requires analysis at both a macro and micro level. 


At a macro level reopening will not only require the legal framework that permits hotels to operate safely and efficiently, but it will also require operating procedures to be in place that inspire guests to have the confidence that it’s safe to travel both to the individual property and also to the destination. In most jurisdictions we are seeing the hotel industry work together with other travel service providers  and governments to ensure that business and leisure travel can resume, with appropriate safety measures in place, as soon as it is safe to do so, and that this message is delivered to the traveling public.


At a micro level answering the re-open/mothball/breakeven question requires a detailed analysis of the financial, operating, legal and health & safety aspects of a property’s re-opening and short-term business plan.  At the end of this paper we provide a check list of the factors for lenders to consider as they review re-opening/short term business plans and associated new money requests.  While the list may seem long and specialised, a thorough assessment is essential in more marginal situations to avoid throwing good money after bad.



The Longer Term


Navigating through the re-open/mothball/new money branches of the decision tree is an important near-term process that lenders will need to undertake. However it is unfortunately only the beginning of the difficult decisions for some portfolio positions. While attractive properties with conservative capital structures may require only a limited restructuring of their obligations, properties that are less prime, more highly levered or suffer disproportionately from the longer-term effects of the crisis will require more significant restructuring and/or new equity.  Many of the latter category will inevitably end up with lenders as their economic and legal owners, putting lenders in a more complex part of the forest with an even longer and more complex check list.  Undertaking appropriate analysis and making sound decisions at this stage will allow lenders to minimise these situations.





Elif Egeli Nisanci


Richard Henshall


Jon Hodnett


David McDiarmid






Hotel Re-Openings and Short-term Business Plans: Factors to Consider


Legal Requirements


Governments are adopting a gradual approach to reopening economies combined with the imposition of new rules and guidelines.


  • What are the new regulations?
    • What are the occupational health and safety requirements for both guests and staff?
    • Are there inspections or certifications required?
    • Are there limitations on occupancy?
      • Rooms
      • Food and beverage
      • Other facilities (pools, spa, kids club etc.)
    • What COVID screening or certification do you require for
      • guests,
      • employees, and
      • deliveries
    • What disclaimers or waivers should you require from staff and guests?

Financial Questions


An updated business plan is required, with detailed cashflows that consider the additional start-up costs and capacity constraints in place.

  • Is it worth opening the hotel with reduced permitted capacity?
    • For instance, if a property catered principally to international business travellers, it might make sense to keep it closed due to the impact of quarantines, budget restrictions, insurance limitations, and as corporate travellers reassess the need for travel versus video conferencing there may not be significant demand.
  • Is it better to mothball for a period until demand recovers? or
  • Is it time to consider converting the property to an alternate use?

Issues that need to be considered include:

  • Can the property afford to hire back its employees?
    • Due to occupancy restrictions, it is unlikely to need all its staff so what is the new resourcing required?
    • Are there union rules on who can/should be hired first?
    • Are there government support schemes and how do they impact staff hiring/retention?
  • Are there sufficient funds in the operating account for restarting payroll, utilities, purchasing orders etc? If not, are there government schemes or new equity available, or will lender support be required to fund this?
  • What are the revenue streams?
    • Rooms (at permitted capacity)
      • how long it will take to put rooms back in inventory after each stay given additional cleaning?
      • cancelation policy - can the property afford fully refundable reservations to be cancelled anytime?
    • Will restaurants be open - guests may not want to go outside to eat as they perceive less risk inhouse
      • Revisit menu - supplies to be ordered locally
      • No more buffets
      • Room service
      • Minibars - will people feel safe
    • Will spa and gym areas be permitted to be open and what services can they offer and under what conditions?
    • Changes required for pool and beach areas, other common spaces?
    • Meetings / events – will there be demand and given restrictions on crowds does it make sense to open?
    • Valet parking and other ancillary services – are they permitted and under what condition will they be allowed?
  • New operating costs
    • Additional cleaning requirements?
    • PPE for employees?

Operators and Management Agreements

Where there is a sperate operator, their performance will be critical to successfully navigating through re-opening / recovery.  Lenders should review operator management agreements in place.

  • Are any COVID related amendments required/proposed/agreed, does the lender have to approve amendments?
  • Do economic and performance terms need to be adjusted?
  • Are there payment terms/deferral provisions that allow cashflow to be preserved?
  • What are the lender’s and/or the operator’s rights to assume or terminate the agreement on enforcement/insolvency/change of control of the property SPV?


Sales and Marketing Considerations


A re-evaluation of the property’s sales and marketing plan is necessary to see if it is still effective post-COVID as we are likely to see different channels recovering at different rates.


  • Direct and personalised marketing is likely to be the most effective channel as consumers are likely to stick with brands and locations that they feel they can trust.
  • Re-focus on those segments most likely to recover in the short term – domestic markets are much more likely to recover before international:
    • Which segments will recover and when corporate travellers, large groups, FIT?
      • Corporates may have realised they do not have to travel as frequently, corporate travel insurance or OH&S concerns may not allow as much travel and workforces will have shrunk.
      • Large travel groups – will probably not be allowed or be capacity restrained
      • FIT or leisure guests – will recover first but due to safety (cleanliness, crowd control, and fear of getting stranded) and shortage of money will be more selective
    • Focus on repeat guests who know and trust your brand and property.
    • Short distance car travel may recover before airline travel, therefore your local market maybe key as people go local rather than international this season.


IT Needs


Technology systems will need to be updated to allow for changes in booking and operating procedures in the new environment.


  • Revenue management will need to be revisited to allow for additional costs including likely increase in out of order rooms and last-minute reservations
    • Travelers will wait to see latest city data, travel restrictions and quarantine guidelines before they book
    • Properties need to calculate their breakeven points and offer promotions/packages accordingly
    • How do you price in the likely increase in demand for fully refundable bookings,
  • Ease of making, changing, cancelling reservations
  • OTAs in line with website information
    • Guests may use OTAs for comparison, but they may want to speak with the hotel directly when receiving final information particularly about health and safety in the local area and therefore more capacity maybe required for handling direct bookings
  • Touchless check in, arriving/entering to room, settling the bill and exit as much as possible

Architecture and Security issues


Physical changes will be required that have both a direct cost but also physical constraint impact on profitability.


  • Are testing or temperature stations required?
  • Are additional sanitation facilities required?
  • Is more space required in common areas for social distancing and does this become a constraint on hotel capacity?
  • How do you factor in social distancing in BOH- for instance can you institute one-way systems so staff do not constantly pass each other?
  • Elevators – how many people at a time, cleaning after each use?
  • Remove extra unused OSE from the rooms – less items to touch and clean
  • Room service, housekeeping, laundry, gym lockers and showers, saunas, steam rooms and luggage service –is it safe to continue (and will guests think so), how do you need to modify?
  • What additional PPE is required for employees?
  • Should the property be converted to another use, then what are the demand factors
    • Offices – demand will decrease
    • Student housing - demand will decrease
    • Elderly housing – confidence needs to return and demand may decrease
    • Health related - research, hospitals etc. – are the elevators and rooms door large enough for wheel in beds, BOH is enough for social distancing, are the conversions temporary or permanent?


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The “Good Bad Bank”: An Alternative Approach to Reconciling Sound Banking Systems with Social Policy Objectives

The unique nature of the crisis requires an innovative response to the resolution of distressed borrowers, a variation to the so-called “bad bank” resolution structure which we have dubbed, the “Good Bad Bank” to help manage viable business back to health.

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Executive Summary

The unique nature of the COVID-19 crisis and its impact on the banking sector calls for an innovative response that balances the needs of the general populace, customers, and shareholders. That being said, while all parties have a vested interest in seeing strong economic recovery through the resolution of distressed loan situations and the continuation of the provision of credit, the desired means through which these ambitions are achieved will inevitably lead to divergent trains of thought.

Therefore, in order to be an ultimately successful one, the response to this issue is one that necessitates a holistic approach that will minimise potential conflicts, as well as the total cost to the general populace.

To achieve this result, it is essential that:  

  • Viable companies are allowed to survive and continue employing staff,
  • The capacity of banks to continue lending and stimulate economic growth is maintained, and
  • State support is allocated efficiently to maximise its impact.

To do so requires a variation to the so-called “bad bank” resolution structures that have been used previously to resolve banking crises, an alternative we have dubbed: the “Good Bad Bank”. Sensible structuring of state bad bank arrangements (particularly transfer mechanisms) can avoid excessive “bailing out” of banks while being more cost effective for society than allowing significant business failures and an ossification of the banking sector.


The financial impact on the banking sector of COVID-19 differs from other crises as it is a broad-based global shock simultaneously impacting consumer demand, production, and supply chains.

Some of the characteristics which make this crisis unique are:

  • Very broad-based (very few businesses have had a good crisis – even Amazon has found increased costs are offsetting gains),
  • Sudden and complete shut-down (compared to a normal crisis where a progressive slow-down in demand allows firms time to adjust),
  • Little or no time to prepare (either staff or stock levels),
  • Efforts to re-open will be staggered and confusing,
  • Extremely rapid rise in unemployment (over period of days not months),
  • Likely ongoing (12-24 month) hit to consumer confidence.

Also of great significance: we are entering into this systemic crisis at a time when global economic growth was already slowing, and when national economies and banks are arguably in a weaker position than at the start of the global financial crisis of 2008. For example:

  • Growth is weaker than pre-2008 crisis, e.g. EEA GDP growth 1.2% in 2019 compared to 3% in 2007.
  • Growth is slow despite persistent government stimulus to spur economic activity, which has led to high government debt: Euro Area government debt is currently at 88% of GDP, compared to 65% in 2007 before the last major crisis.
  • Countries with the weakest banking sectors also have the worst performing economies. For example, Italy has had years of low growth (0.2% in 2019), high government debt (135% end-2018 vs 104% of GDP in 2007), high unemployment (>10% vs 6% end-2017) and a high budget deficit (-2.2% of GDP).

And, while governments and regulators in many countries have intervened by introducing key emergency measures (e.g. subsidies, bank forbearance/moratorium, liquidity support, etc…), when factoring in the reality that most did so rapidly and without an attached framework in place to aid in efforts of normalisation once the worse of the crisis passes, it is reasonable to suggest that the starting point for government support is weaker when compared to their capacity to do so in 2008.

Conversely, many banks are better capitalised than prior to the 2008 crisis, although problems persist in some countries. For example:

  • Many banks are still burdened by legacy non-performing loan (NPL) books from the last crisis (>€600 billion across EU markets), particularly in southern and south-eastern Europe, e.g. Italy at 7% officially acknowledged average NPL ratio, Cyprus at 20% and Greece at 35%. This is very different to 2008 when banks entered the crisis with historically low NPL ratios.
  • Many European banks also retain significant indirect exposure to legacy NPLs, whether through financing provided on NPL sales or retained risk on certain NPL securitisations.
  • The quality of bank loan books is not as high as might be expected. For example, the covenant-light leveraged loan market reached record volumes in 2019, and loan-to-value ratios on real estate lending were driven by valuations at rent levels in many cases at or close to historical highs and yields which were at unprecedented lows – similar to the market in 2007.
  • The low quality of bank assets is apparent in Europe’s banks, having been trading consistently at an average of 50% price-to-book in recent years.
  • Central banks have announced several initiatives to provide capital relief to banks (e.g. suspending countercyclical capital buffers) in order to encourage continued lending to the economy during the current crises.
  • However, banks’ stronger capital positions and the recent regulatory accommodation need to be considered in light of the following:
    • The latest EBA adverse scenario stress test in 2018, which modelled a cumulative fall in GDP over 3 years of 2.7%, unemployment reaching 9.7% in 2020, and a cumulative fall in residential and commercial real estate prices over 3 years of 19.1% and 20% respectively, resulted in a decrease in capital from c. 14% at the time to c. 10% for European’s largest banks. In our view it is likely the current crises will push all of these metrics, and the resulting decrease in banks’ capital, well beyond the EBA adverse scenario.
    • Despite the accommodative stance taken by regulators, banks are likely to limit their support to the economy as they seek to assure market counterparties, bondholders and shareholders that they will not impair their capital positions.
  • Legacy NPLs continues to weigh down the broader system. Of the ~€450 billion of NPLs which have left the balance sheets of European banks since the crisis, a very large proportion currently remain unresolved, sitting instead with alternative capital providers. These unresolved loans represent a continued drag on general economic performance.

The Issue

COVID-19 and the associated public health measures represent a massive and sudden exogenous shock to the real economy, and unlike previous crises this is not a cyclical downturn, deleveraging event, or the self-correction of market exuberance. But it has, depending on the market:

  • Derailed a process of gradual economic re-equilibration and long-term growth, and / or
  • Accelerated and exacerbated a pending correction in asset prices caused by excess liquidity.

The reflex (and correct) policy response from governments and central banks is a proactive approach to attempt to freeze economies to December 2019 levels of employment, productivity, and growth terms.  Therefore, social and public policy has focused on measures to support economic growth via:

  • Maintaining employment,
  • Supporting businesses to stabilise & revive,
  • Maintaining communities and the provision of services, and
  • Promoting consumer and business confidence and spending.

Banks have a critical role in facilitating these objectives through:

  • Providing the channels through which government credit support schemes can be executed,
  • Maintaining active general lending in an otherwise stalled economy,
  • Managing distressed loans, via forbearance and moratoriums, in a manner that is, for the near term, aligned with public policy objectives:
    • Maintenance of employment,
    • Provision of services,
    • Protection of recoverable businesses.

However, over the longer-term, prudent bank management practices are likely to be misaligned with public policy objectives. As economies emerge from the crisis phase banks will:

  • Defensively create capital buffers,
  • Restrict lending in an uncertain economy,
  • Focus on distressed loan management, implementing risk-adjusted recovery maximisation without a focus on externalities such as employment and other government objectives.


The Response – The “Good Bad Bank”

In order to resolve this crisis in an effective manner, what is needed is a government “Good Bad Bank” to assist private sector banks in resolving NPLs in a manner that is consistent with both private sector shareholder goals, as well as the government policy aims of maintaining a strong economy and maximising employment. 

The rapid implementation of a public sector bad bank structure will ensure effective public policy transmission and avoid one of the pitfalls from the 2008 crisis when new credit creation stalled, resulting in a prolongation of the downturn. To be most effective there should be a clear pathway from the current temporary crisis measures to a resolution framework, so that borrowers do not give up hope or lenders act precipitously, resulting in otherwise preventable insolvencies.

However, as outlined above, the actions of prudent banks (particularly if capital is stressed) will prioritise the interests of shareholders, and without intervention, will likely conflict with and impede public policy objectives.

Stressed Banks

Management Actions

Public Policy

Target Behaviour

·       Build up capital buffers (reduce RWA)

·       Reduce lending in uncertain environment

·       Focus on legacy recovery activities not new lending

·       Rapid resolution of NPL to cash maximisation

·       Prisoners dilemma of foreclosing quickly rather than risk further deterioration- no focus on multiplier effects

·       Actively advance new credit

·       Use prudential capital buffers to support new lending

·       Focus on providing stimulus funding

·       Fully evaluate externalities in lending

·       Gentle management of NPLs to preserve employment, businesses and communities

·       Increase risk appetite in uncertain environment


Separating banking sector assets between:

  • “Social policy bad bank” assets where an ongoing degree of management and forbearance is required to support the wider social benefits generated by those assets (employment, housing, etc), and
  • Normal economic assets that remain in the banking system

Will permit the wider public policy objectives of both strong banks to support economic growth while minimising the fallout from the current crisis.

Bad Banks

Good Banks

·       Mission to consider externalities – not profit driven but a holistic approach to value

·       Support potentially viable business on long road to recovery

·       Consider employment implications of actions

·       Consider impact on communities

·       Corporate mission to support societies

·       Elimination of legacy book frees up capital

·       Elimination of NPL income creates new lending pressure

o   Efficient mechanism to implement government-supported credit programmes

·       Management focus on new business, not on legacy



Ultimately, it is in the interests of governments, customers, and bank shareholders to support economic recovery in the most efficient manner possible. And this, we believe, requires the  implementation of a “Good Bad Bank” structure that will work with both banks and customers to ensure a smooth transition from the current regime of government-sponsored COVID-19 measures, to a post-crisis, economically viable system that stabilises employment through the continuation of viable businesses.


David McDiarmid:

Richard Henshall: 

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Retail & Covid-19. Considerations for Banks and Owners

Covid-19 is changing consumer behaviour and has accelerated recent trends. A harsh recession could finish off many retail formats (and retailers), putting borrowers on course for default or debt restructuring.

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Milan, 7 May 2020

Dear Friends,

The customer is always right. Evolving and adapting to new consumer trends, formats and environments has always been a challenge for many retailers, retail owners and lenders. Like many other shocks, Covid-19 is changing consumer behaviour and has accelerated recent trends.  Shopping online and home delivery is creating additional pressure on retailers and retail owners to create a compelling argument as to why consumers should visit a shop, high street or shopping centre or buy anything at all in the current situation.

For retailers, shutting the door was easy. Managing personnel and stock will have been a challenge. Re-opening and winning back customers will take longer and will require a focus on business basics - product, message and clients - to re-build sustainable retail concepts. Many retailers have seen sales fall to zero, while supermarkets and some local small-town grocery stores have experienced the opposite, with sales increases of up to 30% and consumer behaviour commensurate to that of the 1950’s - shopping in the morning and then getting on with one’s isolation business (tea in the garden or a game of Call of Duty) in the afternoon. Most sustainable, well managed retail businesses are able to adapt to new trends over time. However, sharp, sudden shocks of this magnitude cannot be planned for. Luxury retail will be particularly hit given its reliance on travel and tourism, but the majority will survive. Zombie retailers that should have gone out of business years ago that have simply survived on low interest rates, debt riddled balance sheets and easy consumer credit, probably will not. As we emerge from lockdown, some retailers will be in a better position than others. Discretionary spending is likely to reduce. Some retailers will be better placed to capture demand. Many will go bankrupt.

The summary below is an overview of the current key considerations and challenges faced by both lenders and retail owners:

Lenders – Develop Strategic Alternatives

A harsh recession could finish off many retail formats (and retailers), putting borrowers on course for default or debt restructuring. Lenders should evaluate strategic alternatives rather than just take the default option of extending loans and hoping for the best. Lenders are in a challenging position, as in many cases they have or will become the beneficial owners of assets they do not have the organizational structure and expertise to take control of.

Banks should start preparing now for onboarding retail assets. Assets deemed to be the least suitable for loan restructuring will likely be those that are most adversely impacted.  (older, less dominant retail schemes or redundant retail formats). Many retailers will likely go into administration, increasing occupancy and income voids, and resulting in loan defaults. Some owners may decide to just walk away and hand the keys to the lender, and others may, out of desperation, try to renegotiate or delay debt enforcement.  In most cases, banks need to develop strategic alternatives, and be prepared to take control of and manage these assets. 

As they anticipate the cascade of defaults in their retail exposures, banks should take immediate steps to prepare and respond, including:

1.     Segment the book by borrower/owner – professional vs non-professional, likely survivors and non-survivors, considering i) How are they managing their retail positions in the current situation? ii) Have they been investing in their schemes during the crisis? iii) Do they have a plan for re-opening, and a clear approach for reducing the related risks?;

2. Segment the book by retail type/location/competitive position, and differentiate the positions that will likely be affected in the short/medium term and those that are likely to have longer term issues;

3.     Identify high risk borrowers and properties – assume these properties will ultimately need to be onboarded by the lender;

4.     Assume some owners will go into insolvency, and have a back-up plan for operations;

5.     Develop a decision tree and work-out plan for each asset;

6.     Prepare asset-level business plans before onboarding to accelerate repositioning and a sale;

7.     Be prepared to consider alternative uses for redundant concepts;

8.     Develop multiple exit strategies for each asset;

9.     Create an onboarding team and operational capability (internal or outsourced) to take control and manage repossessed assets;

Lenders who act quickly will limit the damage by being in a position to monetize their assets before their competitors, thereby maximizing recoveries and minimizing provisions.  Banks therefore need to be hyper-proactive in managing their retail exposures, as there are numerous operational and competitive threats that can erode the value of their collateral very quickly.


With the majority of retail closed, managing rents is a key issue for retail owners. Many retailers (with little regard to lease contracts) have requested deferrals, discounts or simply refused to pay rent, turning payments into a flexible (potentially cancellable) costs. As a result, there are some immediate actions retail owners should take if their properties are closed. They should:

1.     Focus on reducing operational costs of the retail centre with service providers and in turn the service charge paid by tenants;

2.     Monitor Government advice and timings regarding re-opening and be prepared to safety re-open centres while complying with all health and safety regulations (e.g. limiting visitor numbers, waiting lines, social distancing/density communication, hand sanitizer stations, regular in-depth cleaning, wearing masks and use of fresh rather than recycled air etc) as soon as permitted by local authorities;

3.     Move (even temporarily) to billing monthly where not already doing so. Communicate and support tenants through the crisis, prioritising those that need the most help, such as small and medium sized operators through rent relief and/or deferral and actively manage invoicing vs. collection expectations (and VAT obligations);

4.     Review tenant credit risk registers and develop alternative leasing strategies for units at most risk;

5.     Plan for regular property maintenance to prevent deterioration during the lockdown while reviewing CAPEX plans and deferring discretionary initiatives for 2020;

6.     Manage communications with wider consumers and consider engagement in solidarity actions in support of the communities within the catchment area of the asset;

7.     Negotiate forbearance with lenders;

8.     Review insurance policies for business interruption coverage;

9.     Communicate regularly with any furloughed staff, so they can be remobilized quickly;

The different types of retail owners should be differentiated in this new environment. The professionally managed and well capitalized retail owners will survive, but the non-professional and poorly capitalized owners will not. Those in between will struggle.


The next few months will be challenging. The extent of the damage to retail owners will depend on consumer behaviour, spending power and the knock-on effect to key tenants. The most negatively impacted will be the retail owners of less dominant, poorly managed and/or simply redundant formats that were facing existential challenges long before the pandemic-induced lockdown began.

Many retail assets will become distressed through an increase in vacancy and void lengths due to decreased tenant demand resulting in the inability to service operating costs and debt, which will have a material and adverse effect on capital values in the near term. 

Rather than dwelling on uncertainty and hope, a focus on sustainable asset strategies and detailed risk management plans will separate the strong from the weak.  

As people sit isolated at home with access to the world at their fingertips, the retailers and retail owners who survive and end up thriving will be those that are able to offer the customer a good reason or experience to come to their store or centre other than to simply buy an item.


Daniel Smith


Tel: +44 (0) 7834 572 842


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In the second of two notes, Resolute's CEO Bill Hancock shares his thoughts on COVID-19 on banks and the banking system

The Covid-19 crisis represents a clear threat to banks and their contribution to the effective functioning of the global economy. Realistic assessment of the impact on loan books and early decisive action are key to bank viability and to the availability of credit expansion in future recovery scenarios. 

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Dear Friends

In recent days, we have been repeatedly assured by institutional figures that the banking system is much better positioned to weather this crisis than it was in 2008. Whilst that would be reassuring, it is unfortunately not true.

To be clear up front, we like banks. Not only have they been our main source of employment for most of our adult lives, but their function is a key driver of growth (compare global economic growth before 1900). As we emerge in some fashion from this crisis, we will need credit expansion to fuel recovery, and that means banks. But simply put, when someone has suffered a potentially traumatic injury and may be in shock, a good friend is not the one who pretends that nothing has happened.

It is of course possible that the reassuring messages we hear from institutional figures are intended purely to shore up public confidence in the system, and do not reflect the true assessment of the level of damage which may be suffered by the financial system. We hope so, and if that is the case, we hope we are not adding fuel to the fire that they are trying to battle. But experience teaches us that in the early stages of crises, denial kicks in, and this is what it currently feels like. Given the unprecedented nature of this crisis, the sooner we recognise reality and the massive level of intervention that is likely to be required to preserve the credit channel capacity for credit expansion and policy transmission, the more the damage will be limited.

An assessment that banks are much better positioned to weather this crisis than the last (at least in terms of credit losses) must rely on some combination of the following theses:
1) The economic crisis is not as bad as 2008.
2) Banks have better asset quality.
3) Banks have better capital buffers.
4) The system is better prepared to support banks.
5) The Covid19 problem will turn out to be brief, with the overall shock passing quickly.

There is a possibility that (5) turns out to be the case. Suggestions in a number of geographies that new cases have peaked, studies postulating that the prevalence of unreported and asymptomatic infection mean that the end of the crisis is closer than expected and reports of the potential availability of fast-tracked vaccinations all leave open this potential outcome. However, public health policy is clearly being formulated on the basis that this will not be the case; whilst we hope for a short, v-shaped recovery, prudent policy in relation to the impact of the crisis on the financial system should not rely upon this hope either. Accordingly, this analysis focuses on the first 4 theses.

1) Crisis Not As Bad
We will not dwell at length on this point, as it was covered in our note of 25 March. Suffice it to say that every indicator points to a far deeper and more extended economic crisis than in 2008.

From a credit viewpoint, this crisis seems likely (absent outcome (5) above) to be of a depth we have not experienced in our working lives, with all the accompanying stresses to asset values, income and borrower performance. Underlying borrower and collateral value performance seems likely to be materially worse than in the 2008 crisis; how much worse remains to be seen.

2) Asset Quality of Banks

In 2008, banks entered the crisis with historically low NPL ratios. As in every crisis, they had learned the lessons of the past and their loan books were well positioned to weather a downturn. At least that was the prevailing view. That same old song seems to be playing now.

The reality is that on the asset side, banking systems across our markets enter this crisis weakened by three factors:
• In many geographies, banks are still heavily burdened by legacy NPL books of the last crisis (€600 billion across EU markets alone), particularly in southern and south-eastern Europe (e.g. Italy at 10% officially acknowledged (1) average NPE ratio, Greece at 40% NPE ratio), although other jurisdictions are not immune. Outside of the EU, rapid NPL formation was already anecdotally apparent in Turkey in 2019 and collapsing real estate values in the Gulf suggested rapid but asyet unreported NPL formation across those markets.

• Many European banks also retain significant indirect exposure to legacy NPLs, whether through financing provided on NPL sales or retained risk on certain NPL securitisations (2). 

• New, high-quality loan books: This could be a lengthy debate, but we limit ourselves to the observation that the covenant-lite leveraged loan market reached record volumes in 2019. Closer to our immediate sphere of competence, LTV ratios on real estate lending were driven by valuations at rent levels that were in many cases at or close to historical highs and yields which were at unprecedented lows. These are the same observations one can make about 2007.

On the asset quality front, rather than being well prepared, banks, for the first time in living memory, are entering a second severe crisis with the unresolved legacy of the last crisis still sitting on their books. If this seems unclear, a simple test is to contemplate why Europe’s banks have been consistently trading at an average 50% price-to-book ratio in recent times.

3) Capital Buffers
Of course, the genuinely good news is that capital buffers have increased. However, right now, with average Leverage Ratios at 4.5 – 5.0%, that means banks are 20-25x levered. This buffer does not represent adequate loss capacity in a potentially precipitately falling market.

Somewhat less simplistically, if we focus on CET1 Ratios, these have increased significantly since 2007, somewhere between a 66% and 100% improvement (depending on the impact of definitional changes). Right now, across most of our markets, reported CET1 Ratios are of the order of 15%. However, these reported levels need to be considered in light of the following:

• Absolute (not risk-weighted) asset inflation: Total loan assets across the banking system are up significantly; there is actually more leverage in the banking system than before the last crisis.

• Risk weightings: We should not forget that a residential mortgage at less than 80% LTV is a 35% risk-weighted asset. Many residential markets will already have suffered a hit sufficient to wipe out buyer equity. It seems that certain RWA definitions / calculations have not been built for this market. There is a real danger that RWAs are not currently a good measure of risk.

• Provisioning: Net new Loan Loss Provisions of Europe’s 20 largest banks have recently been below 2007 levels, both in absolute and percentage terms. The buffer represented by LLPs has been depleting, which means a more direct hit to capital from poor loan book performance.

1. We believe that this figure materially understates the true NPL ratio.
2. RWAs on some types of retained risk have increased, but these should be evaluated vis-à-vis probable total loss in a crisisstruck market.

• Asset Quality: Our cautions expressed in (2) Asset Quality of Banks (above), suggest a simple systemic underreporting of potential loan losses, which upon correction would represent a direct hit to reported capital buffers.

Leverage in the system is disturbingly high in the current circumstances. The repeated warnings of certain commentators (3) currently seem at risk of being realised.

4) System Capacity

Certain systemic changes that were implemented during and post the 2008 crisis (e.g. in Europe the SRM) clearly have improved the ability of the system to deal with the emergence of banking crises on a narrow basis (i.e. of single banks, groups of banks or on a single country basis). This is
unfortunately not the reality we currently face.

Rather, we are entering into this crisis, a systemic crisis, at a time when the capacity for critical fiscal and monetary intervention is already vastly depleted. The urgent interventions we have seen from central banks and governments are to be applauded. However, with interest rates already having been close to zero and vast liquidity already pumped into the system, monetary policy options are narrowing. Equally, deficits are not at historically comfortable levels, particularly when adjusted to reflect some of the more obvious impacts of the crisis (just for example, the Italian government is now the economic owner of approximately €50 billion of insured GACS NPL risk).

These systemic factors are compounded by the continued weight on the broader system of those legacy NPLs which no longer sit on the balance sheets of the banks themselves. Of the ca. €450 billion of NPLs which have left the balance sheets of European banks since the crisis, a very large proportion currently remain unresolved, sitting instead with alternative capital providers (fortunately net of significant write-downs). These unresolved loans represent a continued drag on general economic performance (as is perhaps best illustrated by the anaemic nature of recovery in Italy in recent years) and on the overall capacity of the economy to absorb further NPLs.

Perhaps the silver lining is that politicians and regulators seem to have learned from the 2008 crisis. The massive interventions already undertaken signal, for instance, that the deficit concerns which undermined action post-2008 have been re-evaluated. We do expect massive state intervention to continue, although the capacity to continue this will ultimately be constrained by the commencement of inflationary pressures.

Simply put, we see a willingness to pull out the stops on state intervention; unfortunately, monetary and fiscal authorities (across most of our markets) arrive at this juncture like a marathon runner who on crossing the finish line is asked to run 2 more marathons uphill. 

Perhaps it is worth adding that since we started to write this note, we have seen UK mortgage lenders substantially close for business, with those still open increasing minimum buyer equity contributions to 40%. The ECB has ordered banks to cease share buybacks and dividend payments. Rating Agencies have begun to systematically cut bank ratings. Limitless in Dubai has announced that it will be entering into restructuring talks. We expect that this negative news is likely to snowball in coming days.

As we stated at the beginning of this note, we like banks. Our comments are not intended to undermine banks, but rather to highlight the issues the system faces and discourage complacency. It is critically important that steps are taken now to ensure the availability of credit at such times as a new normal is established. This will require dramatic decisions, which will only be able to be made if the true potential impact of this shock is accepted and internalised.

In the short term, this means that banks should:
1. Urgently triage loan books in order to clearly identify and categorise borrowers / loans as (a) still viable, (b) viable but requiring some flexibility on timing and interest amounts, (c) potentially viable but requiring material restructuring (including possible debt forgiveness), and (d) not viable. These judgements need to be made using realistic assessments of the potential duration and depth of the crisis and of the process of post-crisis economic recovery.

2. Apply triage findings firmly in determining where to deploy financial and managerial resources. Categories (b) and (c) merit time, effort, funding and flexibility. Category (d) does not.

3. Present to regulators and government a realistic picture of the damage they are suffering. Unlike 2008, the challenges currently faced, and the crisis itself, are not the fault of banks; the financial system is as much a victim of the crisis as airlines, retailers or the hospitality sector. Given the pivotal importance of credit channels and credit expansion to monetary policy transmission, the health of the sector is vital to prospects of recovery. Interventions such as the IFRS 9 delay are to be applauded, but should not be allowed to camouflage the potential need for much more significant, direct intervention.

4. Actively seek early, dramatic intervention. Banks must focus on ensuring their continued viability as providers of credit to the economy and need to fight to avoid 2008-style measures which left the system fundamentally handicapped by the continued prevalence of bad loans as a drag on performance and management. Whilst the full introduction of broad support measures for banks is premature, the potential for a deep, prolonged crisis is clear and the time to prepare the appropriate large-scale contingency mechanisms is now.

5. Push for the creation and implementation of rational NPL resolution structures and mechanisms. Bank balance sheets are not the logical place for holding and managing loans which need, for public policy and equity reasons, to be managed gently. Similarly, half-measures risk creating significant structural impediments to intelligent resolution (4). The most obvious model for impaired portfolios currently seems to be that of the RTC in the US Savings & Loan Crisis. Given the near certainty that public policy will dictate that many non-performing borrowers should be saved, with their loans managed for the social benefit rather than the lender’s benefit, the creation of the appropriate public NPL resolution structures should be accelerated.

Across the globe, there is no doubt that the wave of fresh NPEs is coming. Now is the time to put in place the frameworks which will allow these to be addressed with appropriate sensitivity at the same time as preserving the viability of the policy-critical banking sector. As green shoots emerge, the world will need banks that are banks, not asset management companies. The time to act is now, rather than when the full force of the storm on banks’ loan books is already apparent.

Our thoughts are with all our friends in the banking and regulatory systems in addressing the issues they face. 

Keep safe.

Bill Hancock
Managing Partner


(1) We believe that this figure materially understates the true NPL ratio.

(2) RWAs on some types of retained risk have increased, but these should be evaluated vis-à-vis probable total loss in a crisisstruck

(3) One of our favourite’s is here:

(4) See for instance the difficulty of implementing REOCO solutions within the Italian GACS framework.

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Resolute's CEO, Bill Hancock's thoughts on COVID-19's impact on the real estate market

In the face of the current uncertainty and volatility, decision-making paralysis becomes a real danger. It is time to act swiftly and decisively in order to ride out the storm. 

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Dear Friends

In the 30 years that the Partners at Resolute have been involved in managing distressed real estate across the globe we thought we had seen just about every variation on a real estate or banking crisis. This one is different; these are extraordinary times and it’s impossible to say with any certainty what the outcome will be. It is still very much early days but there are a few observations we can make.

In the short term we are already seeing an immediate impact on transactions and financings with most either being cancelled or deferred. Asset valuation and rational pricing have become almost meaningless terms, with volatility in many asset classes unmeasurable, liquidity failing, risk premia generally not measurable and any forward-looking income projection lacking a meaningful basis. In such circumstances, most capital providers will tend to focus on capital preservation and hoard capital until new market parameters (“the new normal”) start to become apparent. The old adage of catching falling knives is in force.

At the same time, we will see (are already seeing) distress across all real estate sectors as tenants hoard cash and struggle or simply refuse to pay rent on time. This is the first stage – cash crisis for real estate owners – as companies and individuals try to radically adjust their cost base to mitigate the dramatic fall in income they are experiencing. The issues and considerations deriving from this cash crisis are pertinent to both property owners and lenders exposed to property owners (so most of the banking system).

The resulting feedback loop has the potential to spiral into mass unemployment, market failure and banking crisis in turn leading to further falls in asset income and values. Fortunately, government recognition of the systemic and systematic risks has been swift and unprecedented action is being taken to forestall such a scenario; time will tell whether the tools available to governments are adequate, and what the side effects of utilisation of such tools will be.

Looking forward we know from theory and experience, including the 2008 crisis, that government liquidity actions are positive for property over the medium term; low rates are positive for valuations and risk premia will stabilise at some point. The real concern is on the income side.

A shut down of a few months, on its own, would not have a major impact on valuations, particularly if tied to government-mandated debt moratoria by the banks. However, the reality is that we do not know how long or how deep the crisis will be nor the shape or timing of recovery. We also face the potential of structural change to real estate usage given longer term health precautions and changed behavioural patterns of work, leisure and consumption following the crisis. This in turn implies uncertain real estate revenue streams over the medium term due to the economic impact on tenants and demand.

A very brief summary of the impact we are observing on individual real estate asset classes is attached at the end of this note.

In the current circumstances, property owners across real estate asset classes should be focused on the medium-term viability of existing tenants and the maintenance of occupancy, as these will be the critical drivers of recovery of asset income and value. Indeed, these may well be the crucial tests of the longer-term viability of many properties. This implies a need to work with tenants (and buyers of residential property), even at short term financial cost to owners.

We know from long experience that for assets that are underperforming or are particularly vulnerable, early decisive action is the best way to preserve long term value. Key actions to be taken should include:

  • Preserving cash, including looking at what government support or moratoria are applicable to the landlord, tenants or borrowers.
  • Proactively negotiating with tenants and occupiers as their long-term health is in the landlord’s best interests. Maintenance of occupancy is the key focus.
  • Suspending capex where appropriate, with the focus on essential maintenance to preserve value.
  • Managing working capital, with a focus on cashing receivables and on a not-business-as-usual approach to payables.
  • Securing and maintaining properties that need to be closed, to maintain long term value.
  • Proactively managing lenders, where appropriate.
  • Identifying and retaining key, critical talent.

This picture for the owners of real estate translates to the position of real estate lenders; in fact, many such lenders are now the economic owners of their real estate collateral. As such:

  • Lenders need to determine whether the existing legal owners and managers are adding value to the assets, either through quality of management or provision of capital. Where they are not, lenders need to act swiftly and decisively to ensure appropriately capable management is in place and in action.
  • Lenders need to appropriately support owners and managers who are proactively adding value to the real estate by financially and contractually accommodating the financial compromises they need to make with tenants.
  • Urgent triage needs to be conducted on real estate secured portfolios, particularly construction and development assets. Many such incomplete assets will have no clear prospect of providing an appropriate return on the residual spend; lenders need to segment portfolios between the still viable, the failed and the potentially viable. This exercise needs to be based on rigorous analysis of reality, not on simple mass haircuts.
  • Lenders need to lobby government and regulators (as they are already doing) for dramatic systemic intervention to ensure ongoing credit availability to the real estate sector. This requires direct policy intervention, given the reasonable tendency of each individual lender to use the benefits of interventions currently being made to shore up their own liquidity and capital positions rather than in providing new credit (to be clear, this is over coming months, not today).

At this moment, we are in the midst of a storm of unknown intensity and duration, and the analogy of a ship in a storm is appropriate. Now is the time to lower the sails, put out a sea anchor, and batten down the hatches. Those steps allow a ship to ride out the fiercest storm, even though in the process it may drift away from its desired destination; once the storm has passed the time will come to plot and seek to steer a new course, but that time is not now. Prepare to ride out the storm.

To our colleagues, our clients, our friends, stay safe.

Bill Hancock

Managing Partner


Summary Asset Class Observations

The most immediate impacts are being felt in the hospitality and retail segments, with government mandated closures and travel bans. However, no segment is immune.

• Retail: Closed stores and reduced consumer spending power will create immense stress for most retailers. Many were already experiencing difficulties and with limited cash reserves a wave of bankruptcies and store closures is likely. These factors, combined with the likely acceleration of online shopping habits during the current crisis, are likely to imply structural oversupply of retail space with a resulting negative spiral of retail rents and values.

• Hotel & Hospitality: Hotel assets are also facing all of the obvious short-term issues associated with lockdowns, flight groundings and termination of business travel. These issues are compounded by the issues of physical deterioration of closed hotels and the very significant uncertainties surrounding tourism demand in a future recovery: ongoing travel limitations, changed working and leisure habits and flight availability to name but a few.

• Office: Office markets are likely to see a slower decline given the longer nature of leases, the lower share of occupancy costs as a proportion of total costs and the less immediate impact of lockdown actions. However, the underlying decline in occupier demand will impact deeply, accompanied by a potential shift in fundamental office demand as work-from-home behaviour patterns and technology are developed during this crisis. Again, structural oversupply will likely create a consequential negative spiral of rents and values.

• Logistics: Logistics remains the greatest question mark, given the ongoing need for distribution and the potential for re-onshoring. Greater resilience is to be expected in the segment in the medium term, although in relation to individual assets tenant failure and shifting locational drivers remain of concern. Medium term relaxation of planning restrictions in light of structural changes in the economy driven by the Covid-19 pandemic may also impact.

• Residential: Residential real estate will in most markets continue to be driven by fundamental underlying demand (although this analysis may not apply in those of our markets heavily driven by expatriate occupier or foreign buyer demand). However, the impact of the crisis on incomes and credit availability is already apparent, resulting in material downward pressure on valuations and liquidity. Secondary sellers under income pressure, together with primary selling from distressed developers, are likely to have significant and sustained impact.

• Student Accommodation: In the student accommodation sector students are being sent home and while most of them will have paid for the current semester, the question is what will it mean for next semester. Fearful and financially stressed parents may think twice about sending their children away to study – assuming it’s even possible. As well the massive and sudden move to on-line classes may in fact having a lasting effect on demand in this sector as the education model itself is reassessed.

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