Morgan Stanley has confirmed that the restructured £266.25m CMBS loan, secured by Linklaters headquarters at Milton House and Shire House in the City of London, has been triggered into sequential payment after passing its original maturity at the recent April interest payment date (IPD).
It is understood that Morgan Stanley did not inform noteholders of the Radamantis Eloc 24 securitisation until after the refinancing in February 2010 was complete.
In another example of unintended consequences in the opaque and messy world of CMBS restructuring and loan workouts, this sequential redemption trigger clause also appeared to have caught rating agencies by surprise, even though, in the opinion of one investor “the clause looks like it was originally included with a ratings purpose in mind”.
Sequential payment means all principal receipts under the loans securing the notes will now be applied to the most senior class of notes, rather than on a pro-rata basis across all classes.
The switch in the waterfall is found on page 146 of the bond prospectus, effectively ignoring the extension to the loan on the basis that if the loan balance exceeds 21% of the outstanding securitised notes at the closing date and was not repaid by its original April 20th 2011 maturity then future principal proceeds are applied sequentially to the notes. This happened at the April IPD with the surplus cash flows from the Hayes Park Estate loan.
If this was the case, then it did not work, as Moody’s downgraded the Class A notes in March 2010, over, inter alia, “concerns over a delay of a sequential payment trigger breach after the initial maturity date of the Milton & Shire Houses Loan”.
The investor continued: “Sequential redemption does change the repayment profile for us – if the Linklaters loan were to repay ahead of its extended maturity then we would have received a significant redemption under a pro-rata regime. Now we’ll have to wait for the last loan to repay in full before our notes are redeemed. I’m a little surprised that this clause was not referred to at the time of the restructuring but the documentation does look pretty clear to me.”
The Linklaters headquarters, at Milton House and Shire House in the City of London, was bought by Beacon Capital in 2006 for a figure understood to be for around £350m. The loan servicer, Morgan Stanley, restructured the original securitisation, known as Radamantis Eloc 24, in February 2010 by 18 months to October 2012, following the extension of the Linklaters lease to September 2026. At which time the office was revalued at £270m.
In its March 2010 ratings action note, Moody’s determined that there remains “a high likelihood of default of the M&S Loan despite its extended maturity date”.
RBS CMBS analyst Paul Crawford explains: “This is an interesting call from the Servicer and includes a significant assumption that the loan would have definitely defaulted. We consider Class B through G Noteholders are likely to feel somewhat aggrieved.”
CoStar Finance 