Capital markets are definitely open for the right credits within commercial real estate: for proof of this, look at Cushman & Wakefield’s recent refinancing, which built on the partial term loan extension the company executed earlier this year and gives the business some breathing room to ride out weakness in the sector.

Avison Young is in a slightly trickier spot, however. The company issued a $325m term loan back in 2019, and then added another $50m to that facility in 2021; that debt matures in 2026, and is currently quoted at around 60 cents on the dollar.

The outlook has deteriorated significantly — a year ago, the loan was quoted at around 95. It carries a coupon of SOFR+600bps, so based on secondary market levels, a straight-up refinancing would be extremely costly.

The company has some time before that maturity hits, but its revolver matures in 2024 and is fully drawn, so it needs some kind of solution. That’s one of the factors that Moody’s cited earlier this week, when it downgraded Avison Young’s ratings into triple-C territory.

Ratings at the corporate level and on the term loan are now Caa2, down from B2 previously. The revolver is rated Caa1. This latest downgrade follows S&P, which cut the firm’s corporate and term loan ratings to CCC+ back in March.

Credit Suisse was lead arranger when Avison Young last came to market. That bank, and its new owner UBS, declined to comment when we approached them for this article; Bank of America, which is one of the company’s revolver lenders, didn’t respond to our request for comment.

However, the company itself provided the following response (our emphasis):

“Avison Young was prepared for the downgrade, which is not informed by our future plans or the strong progress we are making with our financial partners to enhance our capital structure and address our obligations. The Company is stable and our operations continue as usual.

Race to recover

According to Moody’s calculations, Avison Young is currently about 16x levered. To get to a more sustainable place, debt needs to come down or earnings need to go up.

The company’s earnings are facing multiple headwinds, however. A source with knowledge of the firm’s operations noted that it had invested heavily in staffing up its middle-market real estate operations, only to see that market shrink amid widespread economic uncertainty.

Property sales, which usually provide a substantial chunk of Avison Young’s revenue, have also decreased across the market. Overall commercial real estate investment volume in the US fell 64% year-over-year in the second quarter to $75bn, according to CBRE research.

“When you have fixed costs and a variable fee structure in main business lines and then revenue gets materially reduced, you are in a bad place, especially if there is debt,” said a second source close to the firm.

A big question, therefore, is whether Avison Young can turn earnings around quickly enough to avoid some kind of debt restructuring.

Based on trading levels in the term loan, the market clearly doesn’t think it has enough time. Neither does Moody’s:

“We view Avison's capital structure as unsustainable and that it will require some level of concessions from its lenders to address leverage, liquidity and cash requirements, particularly over the near term,” said the agency in its report.

The company has already announced cost cuts. Last November, it telegraphed C$25m ($19m) of budget cuts across its global business, with a significant chunk of the savings coming from slashing headcount.

Avison has also attempted to shed some of its business lines. The most recent example of this is the spin-out of its UK restructuring solutions business (essentially a restructuring advisory practice) under the name Watling Real Estate, in June. That deal will allow the broader Avison Young UK team to focus on its core business of transactional and professional services, said Nick Walkley, the company’s UK president, at the time of the deal.

In the current market environment, however, diversification could have some real benefits, sources noted.

Avison Young does provide consultancy and research services, but compared to larger peers like JLL and CBRE, it has fewer “steady state business lines” to hedge against downturns in its transaction-based businesses, said one of the sources familiar with the company.

Silver linings?

That’s not to say Avison Young hasn’t made efforts to diversify. The company has a history of bolt-on acquisitions; indeed Moody’s acknowledged this history as a positive point for the company amid its recent struggles.

Among the firm’s most recent acquisitions was the purchase of three business lines from Madison Marquette last year. Perhaps unsurprisingly — given the challenges it is facing with its balance sheet — the firm has been quieter on the acquisition front this year, however.

Some observers are searching for silver linings. Two sources speaking with 9fin argued that Avison Young was the victim of systemic forces: “This is all a result of a man-made fear of a recession and an exponential rise in interest rates over the last 12 months. Any business would have major troubles,” said one.

That may be part of the explanation, but it doesn’t do much in terms of providing a solution to the company’s current situation. Moody’s noted that for any kind of upgrade to happen, Avison’s leverage would have to come back to around 6.5x, which is a pretty big gap from current levels.

Despite the firm’s troubles, leadership has been publicly bullish. Chief executive Mark Rose gave an interview earlier this month, saying he sees “nothing but opportunity” ahead.

All that needs to happen for real estate to recover, he argued, is for central banks the world over to simply stop hiking rates.

“At that point, it’s a matter of math — and everybody can underwrite assets…[that’s] where velocity comes back,” he told Financial Post, a Canadian outlet. “This too shall pass — probably sooner rather than later,” he added.