Banks are tightening their credit standards, resulting in buyers renegotiating sales prices, and lenders insisting on MAC clauses, which protect them against “adverse change”
Many property transactions have been delayed or have fallen through in recent weeks because of liquidity problems in the capital markets. These problems have left banks unable to further stretch their overstretched balance sheets by taking on new customers.
Banks are supporting existing clients by exploring ways to renegotiate loan terms. But these new terms may be more expensive and force the borrower to try to renegotiate the sale price on deals that have not completed. “I can’t imagine a deal being done without price renegotiation,” says Joe Valente, head of research at DTZ.
“This period of transition is affecting the way people are doing business,” said David Taylor, head of real estate at law firm DLA Piper. “Banks are likely to be increasingly rigorous with clients. Pre-conditions will have to be honoured to the letter.”
Lenders are becoming more prudent because they no longer have the option of selling their debt on through the capital markets, and thus assume more risk. Also, loans that have not been securitised must be offset by a liquidity reserve in order to cover any potential losses.
Thus, the few banks with enough liquidity to execute deals now want better terms because it is more expensive for them to lend. This has led lenders to reduce the agreed loan amount and demand more equity, which may prompt indebted buyers to renegotiate the purchase price in order to preserve their margins. “Several highly leveraged transactions have collapsed because of repricing,” says Barry Osilaja, director of corporate finance at Jones Lang LaSalle.
Swiss department store owner Jelmoli agreed to sell its Swfr 3.4bn (€2.04bn) Swiss property portfolio to Delek Global Real Estate in July. Delek has since requested a price renegotiation, citing financial market turmoil. But Jelmoli has made clear its determination to enforce the original contract. “Jelmoli expressly reserves all legal remedies to enforce and preserve its interests,” said the company.
Periods of financial uncertainty in the past have prompted lenders to include material adverse change (MAC) provisions in their loan contracts. These clauses aim to provide the lender some protection against adverse changes in the borrower’s status caused by unforeseen economic or business circumstances. For example, the economic consequences of the 11 September 2001 attacks prompted both lenders and borrowers to consider the terms that they could get out of a deal.
The present liquidity crisis has revived awareness of the value of MAC clauses. “MACs have come back into vogue,” says a real estate financier at a US bank in London. “Lenders are insisting on them.”
But MACs are rarely utilised. “They are used as a good negotiating tool,” says John Hatton, managing director in the European corporate team at Fitch Ratings. “But there is no evidence to show that lenders have used them explicitly to call in loans.”
Although the market is enduring a credit crisis, banks still want to preserve relationships with their long-standing clients. “It would have to be a dire situation before a bank would invoke a MAC clause because of the reputational risk it would run,” says a director of real estate finance at a UK bank.
One reason MACs are often not exercised is that their conditions are notoriously difficult to prove because no benchmark defining a material adverse change exists. “MAC clauses are a grey area,” says Caroline Philips, head of securitisation at German bank Eurohypo. “What constitutes a material adverse change comes down to each individual loan contract.”
Although there are many variations in the phrasing of MAC clauses, they are usually wide in scope and ambiguous in order to embrace risks that are not anticipated. A senior director at a rating agency says: “MAC clauses are deliberately vague – they are used by one party to cajole the other.”
