During the last downturn, extend and pretend was the name of the game when it came to loan-to-value covenant breaches. Banks didn’t want to end up owning millions of square feet of real estate, so as long as interest payments were being made, they tended to ignore breaches of the LTV covenant, a part of the loan contract that says LTV has to stay within a set range, or the bank can call in the loan or change the interest rate.

Shopping centre owners are starting to breach debt covenants at a faster pace as values in the sector drop. In many cases, income is remaining robust, but LTVs are being breached as yields rise.

So how are lenders dealing with the issue, a decade on from the last crisis? With instances being more isolated so far, they seem to be taking a tougher line.

Extend and pretend — with a twist

Some lenders are waiving LTV covenant breaches, but owners are not getting away unscathed. In December South African firm New Frontier Properties revealed it had breached LTV covenants on a portfolio of three shopping centres bought for £284M. The value of the portfolio has fallen to £181M, which, with £140M of debt, puts the LTV at 77%. As a result, free cash flow from the assets is being used to pay back debt, and New Frontier is having to sell an £8M Dublin logistics asset to make further repayments.

Cranking up the pressure

UK REIT RDI revealed this week that it had come to a standstill agreement with lender Aviva after a fall in the value of four UK shopping centres it owns meant the LTV had risen to 89%. But again this is not a case of kicking the can down the road. RDI now has until 11 October to either sell the portfolio or put more money in to resolve the LTV breach. With an LTV covenant of 85%, that would mean putting in about £9M, and that works on the assumption that the value doesn’t keep falling. The yield on the assets has risen to 9.7%.

The ultimate sanction

This time around, lenders are not being overly shy in pulling the trigger and putting centres into administration or receivership. There are two recent examples of projects being foreclosed, though neither lender has said if it was solely an LTV breach that caused control of the assets to pass to the bank, or if there was an income cover ratio breach as well.

Last year, the Nicholsons shopping centre in Maidenhead went into receivership. It was owned by hedge fund Cheyne Capital, which bought it from Irish Life in March 2015 for £37M, a 6.15% yield, using a £26M loan from Hermes Investment Management. Irish Life bought it for £85M in 2007. It has since been bought by Areli Real Estate.

And it is difficult to say whether Lone Star jumped or was pushed, but the junior lender to a portfolio of five centres has taken control of assets previously owned by the private equity giant.