Special situations: An exit for stressed positions

Specialist investors are buying non-performing loans and creditor claims that incumbent lenders would rather not hold, giving holders of stressed positions a route to exit.

We are seeing more special situations capital at work in UK credit. Much of it is going into problem loans bought from lenders and creditor claims that carry a say in restructurings. The detail below is relevant if you hold a stressed position or are considering special situations investments.

A cleaner exit from a problem loan

Incumbent lenders don't always want to enforce on a non-performing loan. Enforcement is slow and public, and it can strain relationships with borrowers and co-lenders. Holding the loan ties up capital and management time with no clear end point.

Selling the loan to a specialist buyer is an alternative. The seller receives cash and removes the position from its books. The buyer takes on the work-out and the cost of seeing it through.

For a lender that does not want to enforce, a sale is worth considering early, before the position deteriorates further.

Buying a seat at the table

Creditors have a say in how a restructuring proceeds. Investors without an existing position can acquire creditor claims, such as unpaid service-charge claims, to gain that say.

Depending on the process, creditors can influence how value is shared and whether an asset is kept or sold.

Holders of smaller claims often lack the time or resources for a lengthy process. Selling to an investor converts an uncertain recovery into cash.

Wider appetite, flexible structures

Special situations capital is sector agnostic. Alongside loans and claims, appetite extends to:

• Real estate bought at attractive entry prices, with a clear plan to add value
• Listed bonds and traded securitisation pools
• More unusual asset-backed opportunities, some well outside mainstream property

Typical investments start at around £10m, with greater appetite for larger positions. Capital can take the form of senior debt, mezzanine, preferred equity or HoldCo lending, depending on what the situation needs. Investors in this space will also sit alongside other lenders, which allows them to take part in positions too large for one lender.

What this means for you

If you hold a stressed or non-performing position, a sale may be an option. The price you achieve will depend on how the position is presented and which buyers see it.

If you are looking to invest in special situations, many positions are sold privately to a small group of buyers, so access depends on relationships with lenders and advisers.

Heligan's Real Estate & Debt Advisory teams work with lenders, institutions and private capital partners across the UK market, and can help sellers and buyers assess their options.