A Precursor NPL Wave Instead of Classic NPL Sales

A large refinancing wall is building in German commercial real estate. Pre-insolvency restructuring instruments – in particular those drawing on the Act on the Stabilisation and Restructuring Framework for Enterprises (StaRUG) – make it possible to negotiate haircuts with senior and junior creditors, and on the equity side. That, in turn, opens the way for fresh investor capital, without which the necessary restructurings and repositionings could not be financed at all.

By Oliver Platt

For commercial real estate in Germany, a refinancing requirement of around EUR 74 to 86 billion is expected in the years 2026 to 2028 in the senior segment alone. Even today, this is already driving a far-reaching but largely discreet restructuring of capital structures, long before loans are visibly classified as non-performing.

Whereas in the years 2015–2018 portfolios of non-performing loans (NPLs) with volumes of more than EUR 1 billion were not uncommon, the transactions concluded in recent years have become considerably more granular. For months, a wave of non-performing loans in commercial real estate has been forecast, yet large NPL portfolios in the sense of the historical transaction volumes have not so far materialised. This does not mean that little is happening – on the contrary: the clean-up is happening earlier, and in a more decentralised way. Capital providers frequently approach restructuring specialists and investors even before formal loan maturities fall due, in order to work out solutions. Stricter equity requirements, supervisory rules and the experience from the financial crisis that single-name and club solutions often deliver better economic outcomes than package sales all favour this approach. Large portfolios attractive to classic NPL investors, from a volume of roughly EUR 100 million, therefore scarcely come to market. Instead, single-case restructurings in the order of EUR 75 to 90 million are accumulating – particularly in the case of project developments and complex standing assets. Typical triggers are the loss of anchor tenants, increased construction costs or the absence of follow-on financing. In effect, this acts as a forerunner of the NPL wave – a precursor one: many exposures are restructured ahead of time and never appear as classic NPL transactions in the statistics.

The refinancing wall affects the various creditors very unevenly. Senior creditors find themselves confronted with expiring loans whose original quantum, given falling values and higher interest rates, can no longer be fully refinanced. In many cases, sustainable loan-to-value ratios fall significantly, so that part of the former senior tranche now has economic value only on a subordinated basis.

The consequences:

• New agreements or extensions only for the sustainable part of the senior claim, often combined with funded interest reserves, higher margins, repayment holidays or cash-sweep mechanisms;
• Carving out loan portions that can no longer be carried – deferring them, writing them down, or converting them into subordinated, performance-linked components;
• Tighter covenants (DSCR tests, stricter occupancy ratios, capex obligations) and more extensive reporting.

For junior creditors and mezzanine investors, the situation is even more critical. Value corrections hit the subordinated capital providers first. They are frequently “out of the money” in economic terms, even though the claims remain legally intact. Restructurings here regularly force substantial haircuts, conversions into equity-like instruments or debt-to-equity swaps. At the same time, opportunities arise for distressed and private debt investors who take over senior and junior positions at a discount and, in return, take a more active role in structuring. Negotiating power thus shifts towards investors who are prepared to inject new funds and to overhaul the capital structure.

On the equity side, the refinancing requirement leads to a severe erosion of value already invested and of value expected in future. In many cases, on today’s parameters, the original equity is economically wiped out. At the same time, new equity becomes important: without fresh funds, the shortfalls arising from the haircuts and the necessary capex (for example ESG upgrades, conversions, repositionings) cannot be closed.

Typical patterns:

• The entry of new equity investors who, through capital increases or joint ventures, largely wrest control from the existing shareholders;
• Replacing weak or overstretched incumbents with value-add or opportunistic investors that bring fresh operating and financing solutions;
• Retaining the original developer purely as a service developer – for example under management or development contracts, combined with earn-outs – once its original equity has been written off.

Particularly in situations where trust still exists, it can make sense to keep the previous developer on board as a service developer, for example for letting, the management of subcontractors, construction supervision or local stakeholder communication, and to give them a stake in future upside through performance-linked remuneration. The original equity may be treated as lost, but the know-how and local network remain valuable, which can materially support the success of the project and align interests. This model in particular – the former developer as service partner, new equity as the economic owner – is gaining traction. It combines the project experience and local expertise of the original developer with the capital strength and risk appetite of new investors.

In many cases, however, fresh investor capital is not economically viable without prior debt write-downs. New investors underwrite to current market prices, realistic rents, and conservative vacancy and capex assumptions, and demand a market-rate target return on this basis. If the existing leverage is too high, there is not enough return headroom under those assumptions. For this reason, double-digit haircuts are increasingly moving to centre stage, and not only in the case of formally non-performing loans, but already in restructurings brought forward at the senior level.

The typical sequence:

• Analysis of the capital structure and derivation of a sustainable level of leverage consistent with realistic cash-flow planning;
• Agreement of haircuts and arrangements for any upside participations (recovery certificates, equity kickers) with senior and junior creditors;
• The entry of new investors who refinance the residual debt and provide additional capital for stabilisation and repositioning.

Economically, such transactions resemble classic NPL deals: there is an economic debt write-down, a new investor and an entirely new capital structure. The difference lies in the timing and in the instruments: the clean-up takes place earlier and often within a pre-insolvency framework, before loans are officially recognised as NPLs on the balance sheet or sold as a non-performing portfolio.

StaRUG can play a central role in this context. It enables enterprises – including real estate project and property companies – to restructure their liabilities in an orderly manner as soon as insolvency is on the horizon, without yet having to open formal insolvency proceedings. Operational control fundamentally remains with the enterprise, which is decisive in particular for complex real estate projects with ongoing letting or construction activities. StaRUG’s key lever for opening negotiations with a company’s creditors is the so-called cross-class cram-down. It allows a restructuring plan to be confirmed even against the will of individual creditors or creditor classes, provided that those creditors are economically no worse off than in the best available alternative – typically insolvency or enforcement – the so-called “no-worse-off” test, and the statutory majorities are met.

Shifting negotiating dynamics:

• Hold-out strategies of individual creditors lose their appeal, as they can be outvoted in the plan procedure.
• The threat of a StaRUG restructuring plan is, in practice, frequently sufficient to open negotiations and break blockades.
• Creditors are more inclined to accept haircuts and ranking changes when it is clear that the alternative (insolvency/enforcement) is likely to result in lower recoveries.

It is noteworthy that many restructurings do not end in the court-supervised StaRUG procedure at all. Credibly deploying the instrument – say, by tabling a plausible, largely finalised draft plan alongside a binding financing commitment from an investor – is often enough to reach a consensual settlement. Economically, such solutions are comparable with classic NPL transactions, but they begin considerably earlier.

Private investors, in particular from the Anglo-American world, are increasingly stepping in as financiers and co-architects of these pre-insolvency restructurings. They replace banks and mezzanine financiers, taking on the role of new lender or providing whole-loan structures, and contributing additional equity.

Key motives:

• Attractive risk-return profiles from entering situations where haircuts are already agreed and the business plan is clearly defined;
• Opportunities to redesign the capital structure and governance, and so gain greater control over the exposure;
• Opportunities to capture additional upside through earn-out structures and performance fees.

Conclusion: Bringing the Clean-Up Forward, Not Freezing in Crisis

The approaching refinancing wall in the commercial real estate market need not paralyse the sector. Instead, it can enable large-scale clean-ups that are pre-emptive, structured and forward-looking. Many problematic exposures can be restructured before they become visible as NPLs: haircuts on the senior, junior and equity sides, the use of StaRUG with its cross-class cram-down mechanism, and the entry of private investor capital all interlock. In this way, a precursor NPL wave emerges that absorbs part of the risk now – and can significantly reduce the likely size of a later, classic NPL wave.

---

About the author

This article first appeared in German in the BKS Annual Publication 2026.