Managing director Gareck Wilson on plans to bring the servicer’s loans under management to £12bn-£14bn in two years
In the past two months, as the market in continental Europe slowed to a crawl, Gareck Wilson, managing director at London-based loan servicer Solutus, has been as active as ever in the UK, where repricing has already opened up opportunities for refinancing and value-add acquisitions.
But the level of activity is expected to increase in Europe soon. “I’m still a little bit surprised that in the first part of the year we haven’t seen more transactional flow from Europe,” says Wilson in an interview with React News. Seeing most distress at the moment in Germany, Wilson believes owners and banks will soon be realistic in terms of options for refinancing and transactions and will “really start to deal with things”.
Mostly active in the UK and Germany, Solutus currently manages slightly over £9bn of loans, a number that could go up to £12bn-£14bn in the next 24 months. The growth is expected to be driven by the current markets but also by a new push into France, where Solutus recently opened an office. It may also push into Spain and Italy.
Wilson spoke with React about the role of servicing in the current market, expectation of stress turning into distress and how the post-2008 “extend and pretend” strategy is not an option this time around.
How has your summer been in terms of activity?
Typically, we observe a slowdown in the continent over summer, and occasionally, there is a slight easing off of flow in the UK as well. However, this summer, we witnessed no such decrease in activity whatsoever.
A lot of the lending clients we work with are alternative lenders in the debt fund space, who are looking at a wide variety of opportunities depending on their strategies and there’s lots of those opportunities around at the moment. So for us it was a very busy summer. In fact, it was no different from the start of the year.
With so much activity, what’s the role of a loan servicer in the current market?
Most of what we do is on facility agent, loan management type of functions for direct lending strategies with bilateral loans or syndicated loans.
The role, historically, before GFC and just after GFC, was fairly administrative.
But since then, it has taken on a more active, and more value-add type of function, where we work more closely with the borrower, more closely with the lender. We’re looking at spotting problems earlier and adding value throughout the life cycle of the loan.
“Looking at the portfolio we manage, there have been some signs of stress but not necessarily distress”
GARECK WILSON, SOLUTUS
We deal with more requests from borrowers, if they’re looking for modifications of waivers, for instance. Now we work a lot on development loans, so there’s a lot more involvement in ensuring that conditions subsequent for utilisations and drawdowns are met, that payments and invoices are in accordance with the feasibility and the cost schedule. We are a lot more hands-on.
In this type of market, now where we’ve got some volatility and stress, there are more instances where borrowers are seeking modifications and waivers, so it’s really important to look forward and add value and spot potential problems ahead of time.
Are you observing some emerging trends in terms of distress?
Looking at the portfolio we manage, there have been some signs of stress but not necessarily distress.
In terms of things like covenants or timelines or milestones that might slip, probably the market where we are seeing the most distress in, is Germany. Within that market, we are seeing signs of some highly leveraged development loans getting into distress and in those cases the loans are at a higher leverage than what we would typically see in the UK.
Are you seeing borrowers handing back keys?
Where you have development costs that have blown out, timelines have been blown out and where the borrower is unable or unwilling to inject additional capital and the lenders may not necessarily have the appetite to make further commitments, then that provides a bit of a sticking point.
So we are seeing instances of standstill agreements being put in place. In some cases, not necessarily borrowers handing back keys, but lenders taking control via share pledges and stepping in.
Is this mostly in the office market?
I wouldn’t say it’s confined to office. It is linked to development, a lot of development.
Will we see more and more stress turning into distress?
There won’t be the same distress that we experienced post GFC. There certainly is stress.
There is circa a €90bn funding gap, according to a AEW report. That obviously introduces some stress. But banks now are far more well capitalised than they were. They have significant reserves in place. They perform well in stress tests. Their holdings of commercial real estate loans are a lot less than they used to be.
So I don’t see these big pools of NPLs coming to the market. It’s not like that systemic banking failure and the massive values falling off a cliff we saw back in 2008.
We do see some stress or distress trading more on smaller portfolios of loans or loans that may be to a single connection that had multiple assets and loans.
Where do you expect to be more active in the next couple of years?
The UK continues to be our most active market. Over 50% of our portfolio is in the UK. In Germany, we’re seeing a lot of distress. When you look at the debt funding gap analysis that’s concentrated in Germany, France, and the UK, they’re the three markets we’ll be the most focused on.
“We are targeting France as a market that we want to expand into”
We’ve recently established an office in France – we hired our first employee there back in Q1 and we’ve got another person starting there next month. So we are targeting France as a market that we want to expand into.
Are you planning to expand into other countries?
We’re considering Spain and Italy at this stage. We have a subsidiary established in Spain, but we don’t have any employees doing loan servicing there at the moment.
What is the current Solutus business level?
We manage just over £9bn of loans, mostly in the UK, followed by Germany and then across the rest of Europe. In the next 24 months, we hope to grow that to probably £12bn-£14bn.
“In the next 24 months, we hope to grow to probably £12bn-£14bn”
That growth will be driven by the UK, France, and probably Spain and Germany. The other thing we’ll be looking at is building out more an advisory and restructuring platform.
What type of financing do you expect to see growing in Europe, such as CMBS, alternative lending, what you think will be more common in the future?
Alternative lenders are our big target because we do work more direct lending strategies. Our target clients are predominantly debt funds alternative lenders, who may not have the resource or are syndicating out and need a third party to provide that function. They are absolutely a key source of our growth.
How else is your role as servicer changing?
When things are more difficult that’s when the role of the third-party agent servicer becomes more important. It’s when things aren’t going according to plan and we see declines in cashflow, ICR’s being breached, or construction costs going up, timelines going out, reporting not being met, NAV calculations not working.
That’s when the role of anticipating problems as well as providing solutions becomes more important and more valuable.
What else do you expect?
I’m still a little bit surprised that in the first part of the year we haven’t seen more transactional flow from Europe.
That might be a function of the numerous ways that borrowers can deal with a loan maturity.
One is the sort of equity-in refinancing and the massive deal leveraging that’ll need to occur. Borrowers are going to put in more capital to deal with where LTVs and values are.
Solutus recently established an office in France
But we are seeing more need to restructure and extend additional existing loans. Borrowers are using that as one way of addressing it and lenders are generally being reasonably accommodating to that subject to working out hedging, and being able to manage that.
But I haven’t seen a lot of that in Europe yet. And that might be because our portfolio is more skewed towards the UK, but I would expect that to start to pick up, particularly out of summer. I think people are going to come back and really start to deal with things.
Is it because some European countries have the tendency to kick the can a bit further away?
The “extend and pretend” that we saw post 2008 was excessive. I don’t think we’re going to see that again, because part of that was driven by the massive decline in values across the board and the fact that banks were just underwater. There really wasn’t another option other than pushing this along and hoping for the best.
Whereas now, banks are well capitalised, their CRE portfolios are smaller. The reclassification into sub-performing and non-performing is a lot less. They’ve got reserves in place. There are other ways to deal with it.
