By Taline Chater, Partner

1. In Construction, Time May Burn Cash Faster Than It Buys Optionality

Construction standstills are particularly sensitive because time is not neutral. Every additional month granted to a builder borrower may compound losses through costs to complete revisions, accumulating developer liquidated damages claims, subcontractor claims and working capital leakage.

Examples in the Australian market across large contractors and tier‑two builders have demonstrated that lenders will forbear on covenant breaches where projects were “near completion.” While that may be the only commercial response for a lender, without clearly structured milestone, tied to independent cost to complete verifications, completion may not in fact mitigate the lender’s losses. Instead, it may merely crystalise those losses.

In several fixed‑price infrastructure and PPP‑adjacent projects, lenders allowed extensions to the standstills while cost‑to‑complete assumptions were repeatedly revised. In these circumstances, lenders will need to be careful to appoint independent quantity surveyors at the right time, to properly assess and manage the equity value in the asset.

2. Australian Real Estate Standstills – Depressed Market Valuations Should Not Be Tiptoed Around

We have seen commercial property standstills in Australia based on the assumption that the asset value will recover “in the foreseeable future.”

Particularly across office, mixed‑use and retail assets, in distressed situations, lenders have agreed to forbearances based on ‘mid cycle’ valuations, assuming for e.g that leasing conditions will stabilise, rather than requiring present depressed market valuations. While for example, for some high quality Sydney CBD assets a ‘mid cycle’ valuation may be appropriate, we have observed that lenders who have applied depressed market valuations in their standstill assumptions have been in better positions in borrower negotiations. That is, private credit funds that insisted early on, on downside‑case valuations rather than ‘mid cycle’ assumptions, were better positioned to press for equity contributions, asset sales or controlled deleveraging.  Lenders that did not, found themselves negotiating extensions against valuations that did not accurately reflect current market conditions.

3. Intercreditor Fragility in Property and Construction Stacks

Creditor capital stacks in property and construction loans have become multilayered and often without the corresponding rigour of documented intercreditor mechanics.

We have seen standstills involving senior banks, mezzanine private credit, preferred equity and securitised tranches fracture and reconstitute, as creditor incentives divulge in a distress scenario. The more recent  development of the secondary debt trading market in Australia has contributed to his dynamic.

4. Infrastructure Forbearance Breaks Down When Governance Lags Complexity

Infrastructure project loans are often seen as “safe” assets, resulting in lenders leaning into forbearance arrangements when defaults arise. While there may well be very good commercial reasons to continue supporting a borrower in these situations, we have seen examples where forbearance arrangements failed because they were not enabled by appropriate financial and operational governance measures, as the borrowers’ risk profile evolved. Where we have seen infrastructure forbearances and/or standstills succeed, they featured early lender control rights: enhanced consent rights, independent operational reviews and tight controls over in particular, discretionary capex.

5. Credible Enforcement Backstop Is Often the Best Leverage for Lenders

Across construction, real estate and infrastructure, the standstills and forbearances that have resulted in successful outcomes were those where an enforcement strategy was prepared during the planning stage, even if never invoked.  Depending on the lender’s position in the creditor stack, it may be worth progressing a valuation workstream and contingency planning for a receivership and/or administration, prior to or in parallel to consensual negotiations.

Even if the lender does not ultimately wish to trigger an enforcement scenario, in many situations, the credible threat of it doing so may be the only way to obtain a borrower’s commitment to a standstill arrangement.

Conclusion – What This Means for Australian Private Credit Managers and Trustees

Across construction, property and infrastructure debt, standstills and forbearances that we have been involved in or discussed with clients, some key lessons are as follows:

• Standstills must be carefully structured for the particular asset class with key milestones and appropriate information rights for lenders
• Independent asset valuations/reviews are recommended
• Governance measures often need to be tightened as a borrower moves from a stress to a distress scenario
• Intercreditor alignment/divergence must be actively managed particularly as a borrower moves from a stress to distress scenario
• Credible contingency planning including an enforcement scenario is often critical to maintain a lender’s leverage and optionality.