Vincent Barrett’s Pearsanta has begun High Court proceedings to legally sanction the appointment of Solutus Advisors as special servicer on the Alburn Real Estate Capital 6 CMBS, which secures Noel Smyth’s £120m UK secondary property portfolio, CoStar News can reveal.
The proceedings are against the US Bank Trustees Limited, the trustee, and N M Rothschild & Sons, the primary loan servicer, and were initiated using the English High Court’s short-form procedure to attempt to secure a swift resolution, which could see the case heard before the summer recess.
The High Court judgement will determine whether US Bank Trustees should confirm Solutus as special servicer or not, confirming which of the opposing sides has the greater legal merit: the will of the outstanding class A noteholders in the securitisation, which are the only class of notes still in the money and who oppose Solutus’ appointment; or the legal rights of the “out of the money” junior lender which is not expected to make any principal recovery, according to analysts.
At an informal meeting on 8 June, Solutus met with representatives of 69% of the class A noteholders – some of whom also hold more junior securitised notes which are less likely to see a return of their capital – all of whom rejected the appointment of Solutus as special servicer in an informal vote, according to a stock market announcement.
The statement said: “Following the meeting with Solutus and on the basis of discussions between the attending noteholders and Solutus during the meeting, the attending noteholders were unanimously of the opinion that the appointment of a special loan servicer, under current circumstances, would be materially prejudicial to the maximisation of recoveries on the loan and that a special loan servicer should not be appointed.”
Instead the class A noteholders – the largest of which is the Royal Bank of Scotland – indicated their preference to continue with Rothschild’s LPA receivership loan enforcement strategy, through Savills Commercial and Moorfields Corporate Recovery, underpinned by CBRE property level analysis of the portfolio and financial advice by Brookland Partners.
Pearsanta bought the outstanding £11.8m junior loan last November from The Co-Operative Bank for a nominal cost, given that, under all proposed work-out scenarios, the junior lender will see no recovery.
But the legal decision is far from straight-forward. The judge’s focus could well lean towards legal enforcement of contract, rather than simply acting in a fiduciary duty in line with the outstanding noteholders.
Pearsanta is understood to be seeking a High Court ruling to ensure that the US Bank Trustees and Rothschild sign off Solutus in the special servicing agreement. Furthermore, that the Alburn REC 6 CMBS transaction documents requires the trustee and primary servicer to only consider special servicing agreement even including the opinions of any noteholders.
Furthermore, Pearsanta has requested confirmation from Savills, the LPA receiver appointed by Rothschild over the English properties in the portfolio, that it will take no further action in terms of sale of all or any of the property assets until the conclusion of the court proceedings.
However, Pearsanta are understood to have not sought any injunctive relief through courts, to block any property sales and has no authority to do so.
CoStar News understands that Savills will not suspend enforcement proceedings.
A spokesperson for Solutus Advisors said: “This will be an important case for the CMBS market. It is time for a resolution to the REC6 situation and a clear decision on the rights of the junior lender under its documentation.
“This legal action will ensure that clarity for all key parties and prevent any further delays in implementing those strategies available to obtain the best recovery on the investment.
“We continue to hold constructive dialogue with the key parties in the interests of all investors.”
The legal proceedings are a first for European CMBS, with the conflicting legal and fiduciary responsibilities of the trustee, US Bank Trustees, at the centre.
Mark Nichol, CMBS research analyst at Bank of America Merrill Lynch, who last night in a research note forecast the necessity of a legal ruling, wrote: “To our thinking, the note trustee [US Bank Trustees] is weighing two conflicting duties.
“On one hand, the REC 6 transaction documents give the junior lender the right to appoint a special servicer. On the other hand, the note trustee owes a fiduciary duty to administer in the best interests of the noteholders, in our understanding.
“Based on the property valuation reported in April 2012, we think the class A notes could suffer a principal loss, making them the only creditors with an economic interest in the loan. As a result, one important interpretative question, in our view, is whether the note trustee may owe a fiduciary duty to just the class A noteholders.”
Alburn portfolio at a glance
CBRE revalued the Alburn portfolio at £118.2m 1 April, down 5.3% on the September 2011 valuation – less than half the original £250.06m DTZ valuation in November 2006, down a staggering 53% in less than six years.
After swap breakage costs of £13.7m there will be an estimated 14.1% losses into the class As, in the weakest capital recovery for bondholders since the July 2009 enforcement over the industrial portfolio secured by the RBS synthetic Industrious portfolio.
Across the entire outstanding £195.6m whole loan, the net liquidation value is £104.5m, estimates BAML.
The Alburn portfolio is comprised of:
- 29 offices, an increase of one small property post securitisation, valued at £85.55m, down from £180.3m in November 2006
- 13 industrial properties, valued at £21.245m, compared to £37.23m in November 2006
- 2 retail properties, valued at £2.375m, compared to £5.48m in November 2006
- 1 shopping centre, valued at £8.98m, compared to £27.05m
Last September, Smyth, the Irish property investor which owns Alburn Real Estate, attempted to persuade bondholders that to appoint his company as asset managers on the portfolio, forecasting that Alburn could increase value by 23.5% to £160m – only returning 70% of capital to class As.
Pearsanta’s interest in owning the junior loan is instead thought to be tactical, allowing Barrett to influence, through Solutus, the portfolio disposal strategy and – at least theoretically – theoretically replace the appointed LPA receivers, Savills and Moorfields Corporate Recovery.
While Solutus’ appointment would supersede the authority of Savills and Moorfields, on appointment as special servicer, the CMBS loan’s accelerated call for debt repayment is now irreversible.
The process was set in motion by Rothschild on 15 May after Alburn failed to meet an accelerated loan repayment demand initiated following the withdrawal of Hatfield Philips from the process of appointment as the Alburn CMBS special servicer on 3 April, Pearsanta’s original first choice under its rights as the junior lender.
Hatfield Philips declined to say why it withdrew from the process.
Solutus’ servicer rating
Fitch Ratings assigned Solutus a commercial special servicer rating of ‘CSS4’, which they describe as corresponding to ‘Qualified acceptance’ on 11 June – the lowest of Fitch’s four categories for loan servicers.
Fitch’s rating reflects a business that is yet to reach maturity and the small operational team that lacks breadth of special servicing experience compared to peers.
Solutus are also rated ‘average’ by S&P, the required level under the terms set by the REC 6 CMBS documents.
CoStar Finance 