According to research from Bloomberg and Scope Ratings, European real estate companies are facing a significant “maturity wall” over the next three years, with a total of $165 billion of debt expected to mature through 2026. The need to refinance this debt is a looming challenge for many real estate companies that have borrowed heavily in recent years to fund their growth, acquisitions and survival amidst the pandemic. This is especially true of Sweden and Germany; in Sweden alone, Bloomberg expects $40 billion of property groups’ combined debt will mature over the next five years, with $17 billion due by the end of 2024.
The refinancing challenge
Refinancing maturing debt is a pressing issue for real estate companies: Companies will need to deleverage through asset sales, or turn to alternative forms of financing, such as secured lending with banks or capital-market debt.
However, banks are increasingly cautious about lending to the real estate sector, and issuing capital market debt is becoming more expensive due to rising interest rates. For example, the European Central Bank’s main refinancing rate increased from 0% in June 2022 to 4.5% in September 2023. At the same time property valuations in many European countries have been adjusted downwards, causing a rise in loan-to-value ratios—leaving many companies struggling to raise additional capital while servicing their existing debt. As a result, some companies may be forced to accept less desirable terms to meet their refinancing needs, such as steep discounts on property sales or issuing equity.
One option for companies to explore is the use of legal finance as an alternative means of accessing capital.
The role of commercial legal finance
In this context, legal finance can provide a valuable solution for real estate companies facing the maturity wall.
Legal finance allows a company to access capital secured against the expected proceeds of litigation and arbitration claims in its portfolio. Capital provided through legal finance is not debt, but rather a non-recourse investment: In other words, the company repays capital only if and when cases that are financed resolve successfully. Legal finance is thus an attractive alternative avenue to access capital compared to debt and equity. While banks and traditional capital lenders are not comfortable nor equipped to assess and price litigation and its potential returns, legal finance companies like Burford are.
Here are some ways in which legal finance can help address the challenges:
· Releasing liquidity: Legal finance can provide immediate cash flow to a company by monetizing or advancing its legal claims or assets. This can help the company meet its short-term liquidity needs, such as paying interest, salaries or suppliers, without diluting its equity or increasing its debt.
· Cutting costs on legal spend: Legal finance can reduce or eliminate the legal fees and expenses associated with pursuing or defending legal matters. This can help the company save on its legal budget and allocate its resources more efficiently.
· Funding affirmative litigation or arbitration: Legal finance can enable a company to pursue meritorious legal claims that may otherwise be overlooked or abandoned due to lack of funds or risk appetite. This can help the company generate additional revenue streams from successful outcomes or settlements.
· Recovering unpaid judgments: Legal finance can assist a company in enforcing and collecting on judgments or awards that may be difficult or time-consuming to recover due to jurisdictional issues, asset tracing, or debtor resistance. This can help the company realize the full value of its legal victories.
How this benefits real estate companies
There are a myriad of benefits of legal finance for companies, as one corporate counsel said in a recent survey of GCs: “I have explored the use of legal finance and would do so again. The liquidity aspect is a big needle-mover for many companies, especially because it could provoke a settlement earlier, bring in money earlier and de-risks litigation.”
Because non-recourse capital does not affect a company’s balance sheet or income statement—which is particularly beneficial for publicly traded companies—legal finance can enhance its financial metrics, such as cash flow, earnings, leverage ratio and interest coverage ratio. Improving its liquidity position and reducing financial distress provides strategic flexibility and more options and leverage in negotiating with creditors, shareholders or potential acquirers.
Further, in case of loss in the underlying matters being financed, legal finance transfers the risk associated with these matters to the funder, who assumes the downside risk in exchange for a share of the upside reward.
Finally, working with a professional legal finance company provides access to specialized legal knowledge and experience that may not be available internally or externally to the company. Reputable legal finance providers often have a deep understanding of various jurisdictions, sectors and types of disputes and can provide another set of eyes on a company’s litigation docket. However, since control of the underlying matters remains with the client, companies can accept or ignore a funder’s expertise depending on their preference.
Legal finance can be a viable and attractive option for real estate companies in Sweden, Germany and elsewhere to help overcome the challenges posed by the maturity wall. By unlocking the value of their legal assets—assets that would otherwise remain illiquid and act as a drain on resources rather than a source of capital—legal finance can help real estate companies not only survive, but also thrive, in a competitive and uncertain environment.