Capita Asset Services has carried out a beauty parade for prospective financial and accounting advisers ahead of an expected non-consensual restructuring of £1.57bn worth of maturing debt, secured by a portfolio of General Healthcare Group private UK hospitals.
GHG, the UK’s largest private health care provider, is structured as an opco/propco, with the property company component having taken out 36 separate loans from Dresdner Bank, Bank of Scotland, Mizuho Corporate Bank and Barclays Bank over 2006 secured against the same number of UK private hospitals.
The aggregate original £1.65bn debt stack was comprised of two separate securitisations – the Theatre (Hospitals) No. 1 and No.2 CMBS deals at £396m and £264m, respectively – as well as £299.4m in unsecuritised minority senior debt and a further £686.8m in two tranches of junior debt.
After modest amortisation, the outstanding debt as at the March interest payment date was £631.2m across the two Theatre CMBS deals, around £280m in the unsecuritised minority senior debt and a further £650m in junior debt.
This takes the total outstanding debt to £1.57bn, all maturing on 15 October 2013.
Barclays Capital and Danske Bank, which co-managed the two securitisations which came to market in May 2007, arranged long-dated swaps aligned with the legal final maturity of the CMBS bonds, out to October 2031.
As a result of the 18-year mismatch between the maturity of all the senior and junior loans and the term of the interest rate swap, GHG is facing an enormous mark-to-market interest rate swap liability of around £500m liability, estimated by GHG’s largest shareholder Netcare in March 2012, across multiple swaps arranged to hedge interest rate risk in the underlying 36 loans.
With the swaps ranking above to the most senior debt, the two Theatre CMBS transactions, breakage costs to pay the “in the money” counter party swap holders would significantly erode the return of capital to bondholders.
All of which has created a landscape with competing interests among the various equity and debt stakeholders, with all parties seeking to assemble advisers to reflect their positions.
GHG has so far declined to engage directly with Capita on a debt restructuring, and so far only appointed Rothschild as financial adviser, while Capita has appointed Paul Hastings as legal adviser. Capita is close to appointing both a financial adviser and, given the nature of the opco/propco structure, an accountancy adviser.
Capita, who is master servicer of the two Theatre CMBS deals and the minority senior lenders representing 58% of the propco debt, is thought to have spoken to each of the “big four” accountancy firms.
The appointed accountancy firm will be mandated to provide an independent assessment of the financial performance of GHG operating company, only from which can a reliable valuation of the property portfolio be ascertained.
This is necessary because the 36 private hospitals have such a specific operational use, that the value is directly linked to the financial health of the GHG operating company. That is, the sale value of the properties would be lower to non-specialist investors who do not require such bespoke fit out.
Netcare, the largest of the three principal equity owners of GHG which also includes APAX Partners and London & Regional, has already admitted that a consensual restructuring might not be possible, raising the very real prospect of either default, enforcement or even a zombie deal.
Some of the junior lenders, which among others include private equity giant KKR, have assembled an ad hoc group and have appointed Gleacher Shacklock, the restructuring advisory firm, to represent their interests.
The capital stack is further complicated by the presence of stakeholders, both the “in the money swaps”, as well as in the junior and senior debt, which could potentially lead to conflicting interests from single organisations.
“True to form, Capita seem determined to insert themselves as an active participant in any discussions,” wrote Mark Nichol, research analyst at Bank of America Merrill Lynch earlier this month.
Nichol estimated the valuation of the GHG property portfolio, applying the EBITDAR to debt ratio which recently financed Terra Firma’s acquisition of Four Seasons, a comparable healthcare operating company.
“Applying the Terra Firma multiples, suggests GHG could be worth roughly £1.6bn and could support £1.0bn of debt, by our estimates. At these levels, there may be little equity in the propco and the 2013 repayment of £1,574.6m looks challenging to us,” wrote Nichol.
“Netcare could conceivably request an extension of the loan maturity date, a reduction in rent and a write-off of part of the debt to our thinking.
The GHG opco has little headroom to offer increased coupon payments to noteholders, as such a default at maturity in October 2013 is the base case forecast, wrote BAML.
With enforcement crystallising the £500m swap breakage costs, there is also a “zombie risk” on the horizon in which Capita chooses to neither enforce nor extend the loan. An alternative to this would be a debt for equity swap, in which the junior lenders swap their “out of the money” debt in exchange for GHG’s “out of the money” equity in the propco.
Nichol wrote: “This could considerably reduce the propco’s total debt stack and help to facilitate an extension agreement with the propco senior lenders, in our view. Assuming the current holders of the propco junior debt were able to buy in at a significant discount to par, it may make economic sense for them to compensate the propco senior lenders in exchange for their consent for a restructuring, to our thinking.”