This report provides an analysis of the strategies, decision-making processes, and operational requirements involved in managing distressed commercial real estate loans in the UK. It defines special servicing as the management of defaulted or high-risk CRE loans, distinct from routine master servicing.
Transfer to a special servicer is triggered by events like payment defaults, covenant breaches (LTV, DSCR), maturity defaults, or borrower insolvency. A range of workout strategies are investigated, broadly categorized as consensual or enforcement. We discuss how banks and debt funds often approach workouts differently. Workout strategies differ for stabilised income-generating properties versus higher-risk development projects.
We discuss the operational needs of effective special servicing with robust data management, comprehensive reporting, and specialized software with capabilities for workflow management, financial modelling (including ECL/RWA), compliance tracking, and audit trails. Finally, we explore the use of generative AI in the context of CRE special servicing of workout.
