Part III: Excalibur’s CMBS bonds and B-notes

In the final part of CoStar News’ analysis of Excalibur, we look at the deal’s CMBS bond portfolios and the Windermere XIV B-notes.

Excalibur’s CMBS bonds

Diversity Funding – outstanding €107.67m CMBS bond balance (Jan IPD)

Lehman Brothers bought Northern Rock’s entire commercial real estate loan portfolio, Project Gospel, in late May 2007 for £1.6bn, reflecting a 1.3% premium to par value.

The portfolio comprised 1,159 fixed and floating rate loans backed by 2,000 UK properties, with a weighted average LTV of 68%. The granular portfolio was 43% in office, 21% in retail and 16% industrial, with a diverse geographic spread. The 10 largest loans reflected 20% of the pool.

Lehman’s exit strategy was through securitisation in November 2007, through the £1.14bn Diversity Funding CMBS.

Excalibur received £114.40m worth of bonds across four Classes of the seven-tranche Diversity Funding CMBS – Classes D through G. Diversity Funding has a final legal maturity of November 2046.

The outstanding balance fell to £107.67m by the January IPD.

Project Green – €55.30m CMBS bond balance (Jan IPD)

Lehman Brothers bought two German real estate loan portfolios, projects Yellow and Blue, and combined them to create the €585.41m Portfolio GREEN German CMBS in November 2007.

The two loan portfolios are believed to have been sold by insurer AMV, which was seeking an exit to its commercial real estate exposure.

The first of these portfolios was Project Yellow, which comprised performing, sub-performing and non-performing loans, which Lehman paid €569m for in January 2006, reflecting a 6% discount to par value.

The Project Yellow loan portfolio was part of a heavily-concentrated and predominantly West German portfolio, with the five largest loans reflecting 69% of the pool.

Lehman won the Project Blue portfolio bid in December 2006, paying €365m, reflecting a 4% discount. The Project Blue portfolio was secured by 230 properties consisting of 38% multifamily, 23% retail, 14% office, with the balance mixed-use.

Lehman’s exit strategy was to refinance and work-out the loans, as required, and combine the two loan portfolios into Portfolio Green and securitise the loans in the fourth quarter of 2007.

In November of that year, Lehman issued the €585.41m Portfolio GREEN German CMBS, a slightly reduced overall portfolio from the combined projects Yellow and Blue. The four lowest-ranking of the eight-tranche CMBS – Classes D through H – were spun into Excalibur, amounting to €79.91m. The outstanding balance in Excalibur, as at the October IPD, was €58.80m.

The margins on the four Classes of notes are all over three-month EURIBOR, and priced as follows: Class D Notes is 1.75%, Class E is 3.50%, Class F is 5.00% and Class G is 6.00%.

The loans that underpin Project Green, matures in April 2050, comprise 416 commercial mortgage loans, secured primarily on a diversified pool of 205 properties at different locations in Germany. The underlying borrowers include German closed-end funds, listed real estate companies and private individuals.

Windermere XII – €53.90m CMBS bond balance (Jan IPD)

Lehman Brothers Real Estate Partners (LBREP), the bank’s real estate investor subsidiary, and Atemi, the French asset manager, agreed to buy the 1.9 million sq ft Coeur Défense Paris office complex in late March 2007 for €2.10bn from Unibail-Rodamco and Goldman Sachs Whitehall Funds.

Lehman’s equity position was held in LBREP III.

The price reflected a 4.1 % net initial yield. The transaction was financed by a Lehman-led debt package that funded on July 17, 2007 and eventually securitised in the €1.20bn Windermere XII CMBS.

Windermere XII is, possibly, the clearest example of how Lehman Brothers’ investment strategy blurred equity and debt investments.

Lehman underwrote the senior loan, provided to a joint venture partnership, which its subsidiary, LBREP, majority owned. Furthermore, the minority equity partner, Atemi, was itself 40% owned by LBREP.

In addition, Lehman provided bridge equity to close the transaction and co-arranged the subsequent securitisation, with Goldman Sachs, in what was then Europe’s largest-ever single-asset transaction and CMBS.

Lehman provided a €1.63bn five-year senior loan, 50% of which was syndicated to Goldman Sachs when the loan funded in mid-July, the investment bank parent of one of the two joint venture sellers, at a 75% LTV. Lehman also provided €475m in bridge equity financing, of which €75m was syndicated to GE Pension Fund mid-August, 2007.

CoStar News understands that many of the investment grade CMBS bonds were originally sold to, among others, Pioneer Investment Management, United Overseas Bank of Singapore, HSBC and Prudential. These positions may subsequently have been traded in the secondary markets.

Two tranches were spun into Excalibur: €38.15m of the €81.3m Class F notes and €15.75m of the €20m unrated, subordinated debt.

The Class F and Class I3 notes have margins of 80 bps and 200 bps over three-month EURIBOR.

The Coeur Défense whole loan matures on July 10 this year.

Excalibur’s Windermere XIV B-notes

Excalibur still contains three B-notes, which formed the junior loans to senior loans securitised in the €1.1bn Windermere XIV CMBS, which unravels the convoluted structure of the CDO.

The three Windermere XIV B-notes – Kapiteeli Project Sisu, the Baywatch Loan and the Queen Mary Loan – are secured by, partially, the same collateral pool which in the Carlyle Loan, which itself was a loan provided by Lehman to buy a portfolio of Windermere XIV CMBS bonds.

Kapiteeli, Project Sisu – €18.29m outstanding balance (Jan IPD)

Whitehall Street Real Estate Funds, the real estate private equity investment for Goldman Sachs, and Niam, one of the leading Northern European real estate private equity firms, acquired Kapiteeli, one of the largest Finnish real estate investment companies from the Finland government in March 2007 for €424m.

Whitehall and Niam teamed up with Sponda, the Finnish real estate investment company, which acquired the operations of Kapiteeli, while the joint venture partners bought the property portfolio.

The 50:50 joint venture partners financed the acquisition of the underlying 553-strong Finish real estate portfolio with a five-year €389.73m whole loan, comprised of €329.73m senior loan, at around a 75% LTV, and a €47.45m B-note, which took the overall portfolio to almost 85% LTV.

Whitehall and Niam, on behalf of its 2005-launched Nordic Investment Fund III, invested a combined €33m of equity in the deal.

At the time of the deal’s closing, five years next month, the portfolio’s asset allocation was: 55% retail, 35% office and 10% mixed-use, with predominantly concentration weighting in Helsinki, Tampere and Turku, at 42%.

Lehman’s exit strategy for the whole loan was to wrap the senior loan into its €1.1bn Windermere XIV CMBS, which transpired, and sell the B-note to investors. Lehman was unable to find a buyer for the B-note, which was priced at 5.01% over three-month EURIBOR, so spun it into Excalibur.

Over the intervening five-year period, the size of the Kapiteeli portfolio has shrunk dramatically, from 553 to 200, as at the October IPD, reducing the outstanding balance on the Excalibur Kapiteeli B-note to €18.3m, as at the same time period.

The whole matures in two months, on April 15, while the B-note was priced at 5.01% over three-month EURIBOR.

The Baywatch Loan – €4.38m outstanding balance (Jan IPD)

Baywatch Holdings, a Luxembourg-registered private company owned by subsidiaries of JER Europe Fund III and FLD Investment GmbH, borrowed a €54.08m whole loan to finance the acquisition of a nine-strong German retail and office portfolio.

The four-year whole loan, which matures on 15 April, included a €7.5m B-loan, priced at 4.26% over three-month EURIBOR.

This is the B note underneath the Baywatch senior loan, which is also one of the eight loans in the Lehman-issued €1.11bn Windermere XIV CMBS.

DTZ valued the portfolio for the acquisition, at €70.28m, but, after the sale the C-Bruehl asset in Leipzig for €3.08m and some capital depreciation, the portfolio. The Baywatch portfolio was last revalued in April 2010 at €59.79m.

The sale of the Leipzig asset prompted a €280,408.13 prepayment on the Baywatch B loan held by Excalibur, which now has an outstanding balance of €4.37m.

The Queen Mary Loan – €1.16m outstanding (Jan IPD)

Bauwert Property Group, a property company owned by George Sorus’ Gove International, acquired a 19-strong West German office and retail portfolio from a German insurance company in November 2006.

The Project Queen Mary portfolio was financed with a five-year €61.96m whole loan from Lehman Brothers, based on the portfolio’s July 2006-valuation of €83.04m.

Lehman carved off a €4.5m B loan, priced at 4.04% over three-month EURIBOR, which funneled into Excalibur. The senior loan formed part of the eight-loan €1.4bn Windermere CMBS.

At the time the deal closed, some of the properties were still in construction, and as a result, the vacancy rate was 29%.

The Project Queen Mary had 12 properties remaining as at the October IPD, while the vacancy rate had fallen to 16%. BNP Paribas Real Estate revalued the portfolio last September, at €45.65m.

And then there were two..

CoStar News’ research has left just two outstanding Excalibur positions, at least for now, obscured – Phineas Hugo and Project Mercury – but do recheck this page as it will be updated when the borrower details emerge.

Deutsche Bundesbank, Lone Star, Hudson Advisors and Hatfield Philips all declined to comment.

About CoStar News

Finance Editor, CoStar News
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