Deutsche Annington’s much-anticipated restructuring proposal for the €4.46bn debt securing its €8.4bn German multifamily portfolio has balanced the competing interests of bondholders and Terra Firma’s IPO ambitions, prompting a price spike in both senior and junior notes this week.
After 10 months of intensive negotiations between Deutsche Annington, and advisers Blackstone, Rothschild and Allen & Overy, the wider bondholder pool finally saw the blueprint of the proposal on Tuesday morning, offering a solution which blends a faster-than-expected return of capital with a slightly lower-than-hoped for margin step-up, in exchange for a five-year loan extension.
There in lies the very heart of this restructuring proposal: a delicate trade-off in each of the central negotiating points, across “day one” equity, margin step-ups, amortisation and refinancing targets – along with the subsequent pro rata repayment schedule – as well as Terra Firma’s requirement to delever Deutsche Annington before its next year IPO.
The detail is immense and requires careful study to unpick.
Each of the major bondholders, outside the six-strong ad-hoc group which helped shape its form, have by now already been walked through the detail, while a wider group of noteholders reflecting as much as 75% have been informed throughout the process, to the permissible limits of those “not inside”, prohibiting secondary trading.
This is a deal considered by those up and down the capital stack to be well-balanced, but it should be remembered that its formation reflects a 32%-strong only bondholder group, with their dominant economic interests in the class As.
That should not, however, undermine the balance of the deal – which has received widespread approval – but still leaves open the possibility that when Capita Asset Services, GRAND’s primary loan servicer, convenes its noteholder meeting next Thursday that new perspectives could emerge.
And so to the detail.
Deutsche Annington’s outstanding €4.46bn CMBS debt, in the German Residential Asset Note Distributor securitisation, is expected to fall to €4.32bn by October interest payment date (IPD).
Under the terms of the refinancing proposal – for which heads of terms have been agreed by the ad-hoc group, comprised of BayernLB, ING Investment Management, JP Morgan, Landesbank Baden-Württemberg, PIMCO and Standard Life Investments – €504m equity will be injected by Terra Firma.
The composition of this equity is a straight €240m of equity, plus €239m in bonds owned by Terra Firma subsidiaries, incrementally purchased in secondary markets which will be subordinated below the class Fs notes, at a equivalent margin increase.
In addition, €25m will be credited to the refinancing account.
The aggregate of this principal equity and subordinated debt injection will reduce the forecasted outstanding balance to €3.84bn, as at the October 2012 IPD.
After the equity, the LTV will drop to just below 60%, buffering the junior notes from fear of recovery loss.
Probably the single largest issue raised by bondholders was the perception that margins were light, relative to loan market pricing.
The class As are bumped up from 24 bps, by the same 116.7bps which all subsequent classes equally receive, to 140.7bps, which looks light relative to the circa 225bps Deutsche Wohnen paid for a seven-year loan to four banks to finance its €1.235bn BauBeCon portfolio acquisition from Barclays in May.
The trade-off is in the greater amoritisation schedule. The over-riding preference among bondholders was for a visible end-game for their return of capital over short-term loan market margin price-matching.
Some junior bondholders feel the lack of a premium margin step-up for their notes was less palatable, but the counter is the pro rata refinancing repayment schedule, not least the doomsday prospect of loan default at maturity and a zombie deal until special servicing is installed and a distressed sales process is launched.
Amortisation and refinancing
Much of the success of this thorough near year-long negotiation with the ad-hoc group, ultimately, boils down to Deutsche Annington’s own ability to deliver on the aggressive refinancing targets which will, in turn, determine the timescale in which Terra Firma can conclude its long-planned IPO for the Germany residential property company.
Deutsche Annington is targeting five staggered annual refinancings, beginning with €1bn next year, followed by €700m in 2014, €650m in the following two years, and the balance in the fifth and final year.
A somewhat rather modest 25bps penalty across all classes has been offered if the first year’s refinancing target is missed.
Crucially for junior bondholders, repayments to bondholders upon completion of refinancing pools is pro rata, rather than sequential. This means that when Deutsche Annington closes the staggered refinancings over the coming five years bondholders will recieve proportional repayments down each of the six classes.
This feature of the deal will surely encourage junior noteholder support.
The sources of the refinancing will stretch across German pfandbrief and landesbanks, as well as international investment banks and insurance companies.
No doubt there are bond investors in the GRAND deal which will return to the portfolio outside the CMBS through one of the five annual refinancing targets, which themselves are likely to be subdivided as required.
Terra Firma’s IPO ambitions
Much of Deutsche Annington’s strategy could be said to be reflective, or even driven, by the purpose of its parent company Terra Firma, whose ambitions to float the company are compatible with both the needs for delveraging and capital expediency for bondholders.
Deutsche Annington has stiputaled that an IPO will not before the outstanding debt has fallen to at least €2.4bn, in addition to 57.5% LTV ceiling among the most relevant coventants.
The end game is nigh
It would be naive to think this is the end of the bartering, but no one is expecting substantive changes. This is an elaborate negotiation not complete, but very near.
The class As, as of yesterday, were trading at 96.55% – just a 3.45% discount. Exactly two weeks ago they were trading at 91.5%. In the As, the improvement is significant for the proximity to par given an unconfirmed restructuring.
Further down the waterfall the two-week improvement becomes more interesting. The class Bs, moved from 84% to 91.75%; the Cs moved from 77% to 88.5%; the Ds moved from 73.5% to 86%; the Es moved from 68% to 84.5%; the Fs moved from 63% to 83%.
Clearly, pricing has improved most among the juniors, reflecting the considerably increased security junior bondholders now have on their return of capital.
This remains a deal to conclude, no doubt next Thursday’s Capita meeting will be keenly attended noteholders as the voluminous detail, and feedback of it, unravels in what is Europe’s largest-ever CRE securitisation restructuring in this cycle.