Cornerstone closes maiden £83m 12-year loan with Derwent London

Derwent London, the West End office specialist, has closed £83m 12-year secured senior loan with Cornerstone Real Estate Advisers, completing the refinancing of £575m in maturing debt over the last 15 months diversifying away from bank finance in preference of longer-dated debt.

For Cornerstone, a subsidiary of US insurance giant MassMutual, this represents its first property lending deal in Europe, which funded the senior loan on Wednesday.

The facility was arranged by Laxfield Capital, who will also act as manager of the loan.

The £83m 12-year interest-only secured debt facility, which matures in October 2024, is secured by 8 Fitzroy Street and 120-134 Tottenham Court Road which are together valued at £172m, putting the LTV at 48.3%, while the loan is priced at 210 basis points over gilts.

The all-in-cost of debt is 3.99%, with a 70% LTV covenant, which would require a fall in value of the two properties to £118m to breach.

The long-dated loan increases the weighted average unexpired term of drawn debt to around 6.6 years.

As part of this refinancing, Derwent cancelled a £65m interest rate swap, due to expire in March 2013, at a breakage cost of £600,000.

Derwent has fully leased both properties: 8 Fitzroy Street, an office block let to Arup, the engineering and design group; while 120-134 Tottenham Court Road is a multi-tenanted residential block, which extends to Warren Street and Grafton Way and incorporates the 330-room Grafton Hotel.

Cornerstone’s £83m loan refinanced the remaining £95m outstanding balance on an original £375m legacy syndicated loan, led by the Royal Bank of Scotland and Barclays along with six more banks, arranged by London Merchant Securities (LMS) in 2006, the property company which merged Derwent Valley to form Derwent London in 2007.

The revolving credit facility (RCF) was the final of a string of 2013 debt maturities amounting to £575m, which Derwent started addressing last summer, beginning with the extension of an existing £100m RCF with the Royal Bank of Scotland in June 2011.

The extended facility matures in April 2015, with a margin proportional to the LTV on secured pool of properties, expected to remain below 200 basis points.

At the end of last year, Derwent replaced a second £100m revolving credit facility with Lloyds Banking Group, due to mature in November 2013, with a larger £150m facility with Lloyds for five years, maturing in January 2017.

The Lloyds RCF margin is also linked to the LTV of the security pool, which is currently – and is expected to remain – again below 200 bps.

Also last December, Derwent signed a new £150m five-year RCF provided equally by the Royal Bank of Scotland and Barclays, again with a margin below 200 basis points and LTV-linked.

Derwent’s diversification of debt began last June with the issuance of the first convertible bond placement by a UK property company for four years, with the five-year £175m unsecured investment grade issuance pricing at a biannual coupon of 2.75% with an exchange premium on maturity of 30%.

Following the refinancings, Derwent has reduced the proportion of its drawn bank debt from 80% at the turn of 2011 to just below 50% in a little over 18 months.

Damian Wisniewski, Derwent London’s finance director, said: “This new long-term, fixed rate loan provides a diversified source of funding for Derwent London at a modest all-in interest rate, taking advantage of the recent falls in gilt rates. It also enhances our debt maturity profile and adds an important name to our established pool of lenders.”

Charles Weeks, CEO of Cornerstone Europe, said: “The completion of our first real estate debt transaction so soon after entering the UK market, and with such a high calibre partner as Derwent London, is a significant achievement and clearly demonstrates our intention to put Cornerstone at the forefront of the senior lending market in Europe.

“This will complement the already established position in this field in the US, where we have a debt programme with more than $20bn of assets under management, in multiple facets of real estate finance.”

Nick Pink, CIO of Cornerstone Europe, added: “This transaction is a perfect example of the kind of deal we are keen to undertake in the early stages of what will become, over time, a broader strategy.

“In this case, we were able to work with a top-tier sponsor who was willing to expand and diversify its pool of lenders, which enabled us to lend against grade A assets with very long-term, high quality income streams which are able to support an extended timeframe to maturity.”

The deal is typical of the type Cornerstone is targeting in the UK, where it is seeking to provide property-secured senior loans, with a single property target lot size of between £25m and £75m, on maturities between seven and 20 years.

About CoStar News

Finance Editor, CoStar News
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