London & Regional’s LoRDS CMBS restructuring proposals were passed in a bondholder vote this morning, paving the way for three one-year loan extensions and margin step-ups to aid asset management ahead of the disposal of the Livingstone brothers’ four-strong securitised office portfolio.
Central to ensuring that the economics of the restructuring proposal worked for London & Regional and bondholders, was to persuade the junior lender, FMS Wertmanagement, to accept an undisclosed haircut on its current partially out-of-the-money £128.25m B-Loan and substantially reduced control rights.
London & Regional’s restructuring vote success paves the way for a pro rata £56.7m prepayment to the class As and Bs on 18 December, taken from the circa £65m sale of 68 King William Street to Manafea Holding, a Saudi investor, in mid-October.
The comprehensive debt restructuring proposals comprises three 12-month loan extensions, linked to amortisation targets, margin step-ups, and asset management initiatives to increase the remaining four-strong LoRDS portfolio in value by 46.3% – from £213.4m to £312.2m.
London & Regional, advised by AgFe, and Cairn Capital, the financial adviser to around 70% of the London & Regional Debt Securitization (LoRDS) No 1 CMBS bondholders, together with B-Loan owner FMS Wertmanagement, consulted on the restructuring proposals.
The interest-only London & Regional Debt Securitization No 1 CMBS (LoRDS) still has an outstanding balance of £234.2m, while the £128.25m B-Loan owned by FMS Wertmanagement, the bad bank which spun-off from Hypo Real Estate, takes the whole loan to £362.45m.
Following the King William Street £56.7m prepayment on 18 December, the outstanding securitised balance falls to £177.5m, and the whole loan falls to £305.75m, which based on CBRE’s August desktop valuation of the remaining four offices at £213.4m, puts the senior and whole LTVs at 83.2% and 143.3%, respectively.
However, there is also a 10-year unexpired interest rate swap, maturing October 2022, with a current mark-to-market (MM) liability of £34.9m, ranking senior to the securitised balance.
If the restructuring proposals were rejected and the LoRDS portfolio was put into receivership, the November-dated swap MM would erode recovery back to bondholders to £142.6m, assuming assets were disposed at current CBRE valuations and less servicing, marketing, legal and advisory fees.
Disclosure of the swap in the original offering circular was sub-optimal. Fitch Ratings, writing on 2 October, said the long-dated swap on LoRDS 1 “which was not (to Fitch’s knowledge) previously publicly disclosed. This updated information suggests noteholders are exposed to greater risk than previously identified”.
LoRDS restructuring proposals
The first of the three 12-month extensions for the outstanding LoRDS CMBS loan would run to next October and is without any immediate additional debt repayment, save for the impending £56.7m prepayment to bondholders, following the King William Street sale.
The subsequent two 12-month extensions would run from between October IPD 2013 and 2015, subject to London & Regional reducing the outstanding balance to £161.7m and £99.0m in 2014 and 2015, respectively.
The loan extensions require the extension of legal final maturity by three years to October 2017. Under the proposals, a special servicer must be appointed within three weeks if amortisation targets for October 2013 and October 2014 are not met or interest cover ratio (ICR) falls below 110%.
In exchange, London & Regional will increase the margins in the class As from 21 basis points to 425 bps, and the in the class Bs from 32 bps to 475 bps. The class As include a 0.25% payment in kind (PIK) and the class Bs include a 2% PIK, both compounded quarterly.
Asset management strategies
London & Regional’s proposed asset management strategy targets a substantial increase in the portfolio’s exit property values, an increase of 46.3% – from £213.4m to £312.2m, which covers the post King William Street prepayment outstanding whole loan balance of £305.75m.
However, the long-dated swap would still have seven years to run and would remain a potentially erosive influence.
At asset level, these targeted exit capital values are comprised as follows:
- First Central Business Park in Park Royal targeted to increase value by 4.5% – from £68.5m to £71.6m;
- Skipton House in Elephant & Castle, targeted to increase value by 49.5% – from £53.9m to £80.6m;
- Trinity Bridge House in Salford, targeted to increase value by 126.5% – £17.9m to £39.2m and;
- St George’s Court in Bloomsbury, targeted to increase value by 63.9% – from £73.7m to £120.8m.
The proposed near-term asset management initiatives include re-gearing a key Trinity Bridge House lease, the continuation of London & Regional’s £30m refurbishment programme at St Georges Court.
In October, Fitch Ratings wrote that the proposed £30m St Georges Court refurbishment programme includes £6m to be injected January, with the rest to be injected thereafter. Fitch wrote that the asset management proposal “provides a promising avenue to increase collateral value, albeit at the cost of bearing completion risk”.
Property management fees are proposed to be reduced from 20 bps to 10bps, based on the August CBRE desktop valuation.