European Central Bank Banking Supervision published a Supervision Newsletter article summarising good credit risk management practices observed in its commercial real estate (CRE) on-site inspection campaign for bullet loans and loans with high balloon payments, where more than 80% of principal falls due at maturity. The article focuses on how lenders can better identify and mitigate refinancing risk in a higher-rate environment and amid structural pressures in some CRE segments. The practices span loan origination, monitoring, modelling, collateral valuation, sponsor assessment and board oversight. These include defining and measuring refinancing risk explicitly in policies, testing repayment capacity using sustainable and forward-looking cash flows with an indicative repayability horizon of 15 to 30 years for CRE property loans, and using covenants that complement loan-to-value (LTV) ratios with cash flow-based metrics. Portfolio monitoring practices include heatmaps covering all bullet loans, deeper analysis for exposures with less than 18 months to maturity, and explicit use of refinancing risk in watchlist and unlikeliness-to-pay assessments, including analysing required equity injections to right-size loans at maturity. A case study illustrates how a EUR 100 million office bullet loan could require a EUR 40 million equity injection to meet a maximum 75% LTV ratio and minimum 1.80x interest coverage ratio refinancing standard after collateral values and income fall. The article also points to accelerated revaluation cycles after abrupt macroeconomic changes and, in stable conditions, full revaluations at least every three years for loans above EUR 3 million or 5% of own funds, supported by independence safeguards for valuers, documentation of interactions, and internal challenge. Sponsor-related good practices include explicit sponsor requirements at origination, ongoing assessment of capacity and willingness to support refinancings, and clear, documented rules for reflecting sponsor support in unlikeliness-to-pay decisions. For governance, management bodies are encouraged to receive reporting that highlights valuation limitations, refinancing risk beyond maturity walls, provisioning model limits and overlays, IFRS 9 Stage 2 identification, and risks arising from “amend and extend” approaches. The article notes that it does not set supervisory expectations beyond current regulations and that many of the practices are applicable beyond CRE to other bullet loan financings, including asset, acquisition and project finance.

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