Part I: A definitive guide to Europe’s largest 2013 CMBS loan maturities

This is Europe’s biggest year yet for CMBS loan maturities with the endgame in sight for many of the largest securitisations issued on this side of the Atlantic. CoStar News reviews the 10 biggest and explores the likely outcomes.

By the end of last year, there was an estimated €60.5bn of floating rate European CMBS debt still outstanding, according to figures compiled by Deutsche Bank, and as much as €93.6bn including long-dated fixed rate CMBS transactions, according to Bank of America Merrill Lynch (BAML).

Within the floating rate €60.5bn total, there is as much as €22.8bn scheduled to mature this year. The jurisdiction breakdown for the €60.5bn total is as follows: €25.4bn in Germany, €22.9bn in the UK, €4.1bn in France, €2.4bn in Italy and the remaining €5.7bn spread across the rest of Europe, according to Deutsche Bank’s CMBS research team.

This enormous 2013 CMBS maturity profile includes the now restructured Deutsche Annington’s GRAND CMBS – which had a €3.8bn outstanding balance at the end of last year – which implies that this year will now see more UK loan maturities than German. The revised early first-quarter 2013 CMBS maturity profile falls to €18.2bn, according to BAML.

Deutsche Annington’s refinancing strategy for the GRAND CMBS has already seen €504m in equity injected by parent Terra Firma, a €656.6m Berlin Hyp senior, as part of a wider €786.6m refinancing, and the promise of asset disposals over the year.

There are 41 European CMBS loans maturing this year with an outstanding whole loan balance above €100m, which aggregate to €14.45bn, and to €12.83bn, on a senior securitsied only basis, according to figures compiled by Barclays Capital.

These impending loan maturities will see all manner of strategies employed: CMBS restructurings; external refinancings; loan enforcement; loan sales; as well as new CMBS issuance to emerge from maturing deals.

Across the full real estate spectrum, there will be considerable interest: for financial advisers and competing loan servicers for CMBS restructuring and servicing mandates, senior and mezzanine lenders for refinancings, private equity funds for asset and loan sales, as well as agents for the valuation work, LPA and fixed charge receivers and investment banks for issuing new capital market solutions. And, of course, there are the lawyers for all the above.

The spread of scenarios in Europe’s biggest CMBS loan refinancings is considerable, as is the complexity.

In a two-part analysis, CoStar News reviews the 10 largest.

1. German Residential Funding (GRF): three-part refi strategy including €625m CMBS

Borrower: Gagfah

Issuing banks: Deutsche Bank and Goldman Sachs in August 2006

Remaining collateral: 76,761 German multi-family residential units as at November half year 20102 results

Remaining balance: €2.08bn as at the October IPD

Loan maturity: 22 August

Gagfah, Germany’s second-largest property company by market value, is implementing a four-pronged strategy to refinance around €2bn and undertake small disposals ahead of the August’s €2.08bn maturing securitised debt.

The four strategies have been designed to spread Gagfah’s €2bn debt requirements across the widest pool of potential lenders as possible, to ensure the most competitive terms.

These consist of:

  • circa €475m seven-year senior loan from a German pfandbrief bank.
  • circa €700m is to be refinanced in three separate tranches of approximately €230m, €250m and €320m on durations of between five and 10 years.
  • circa €625m in a new issuance CMBS this year, expected to come to market later this year via Gagfah’s current advisers for its refinancing, Uni-Credit and Goldman Sachs.
  • there are also two pools of debt – at €90m and €110m each – which will predominantly be repaid through disposals, with the possibility of smaller refinancings for assets in the latter of the two.

The most eye-catching strand of Gragfah’s refinancing strategy is the circa €625m CMBS which is expected to come to market later this year via Gagfah’s joint co-ordinators and advisors Uni-Credit and Goldman.

Gagfah said at the time of it half-year results last November that the all-in cost of debt, through the partial new securitisation, would have to be equivalent or lower to its current blended 4.1% interest rate.

Likely bond investors in the CMBS will include JPMorgan, a major German multi-family CMBS bond, which investor took €565.5m in Vitus Group’s €754m Florentia securitisation.

Other possible investors are also thought to include Meag, the global asset manager on behalf of Munich Re, M&G Investments and Blackrock, CoStar News understands.

In respect of the three separate five-to-10-year maturities, Gagfah is understood to be in advanced discussions with European insurance lenders including AXA Real Estate and Allianz Real Estate, while the Deutsche Pfandbriefbank is understood to be considering the circa €475m-sized pool.

Gagfah, which is majority-owned by Fortress Investment Group, has been subject to press reports this week that Deutsche Wohnen may submit a takeover offer, prompting a share price surge to a four-year high.

A merger between Deutsche Wohnen and Gagfah would benefit shareholders by reducing costs, according to analysts. But a company spokesperson for Deutsche Wohnen has dismissed this as just “rumour”.

2. EPIC Barchester: Barchester’s £914m debt complexity to lead to simplest of solutions

Borrower: Barchester Healthcare Homes

Issuing bank: The Royal Bank of Scotland

Deal: Epic (Barchester) plc

Remaining collateral: 160 properties

Loan maturity: 30 September

The Barchester Healthcare is almost the archetypal story of how a group of entrepreneurs smelt a fortune could be made from the underlying value of a care home real estate portfolio by spinning the properties into an opco-proco and refinancing the debt through a securitisation.

This, of course, with a little help from an investment bank and some financial engineering. The resulting complexity which has ensued – much of which still lies ahead of the loan maturity this September – is enough to tax even the most muscular of financial minds.

Back in the middle of the last decade, Barchester Homes’ founders John Magnier, John Patrick McManus and Dermot Desmond rapidly expanded its care homes portfolio, financed by cheap debt from the Royal Bank of Scotland.

By autumn 2006, and including the notable £525m acquisition of Westminster Health Care Holdings from 3i two years earlier, Barchester Homes had become the-then fourth largest care home operator in the UK, with a portfolio of 160 homes.

RBS then split Barchester Healthcare into an opco-propco structure. The property company – called Bluehood Limited – leased the care homes back to operating company, Barchester Holdco Limited, on 30-year term retail price index-linked leases, which significantly enhanced the underlying value of the care homes.

Colliers CRE then valued the 160-strong portfolio – including 141 in England and Wales – at £1.135bn, against which RBS had provided three separate loans – a senior loan, a stretched senior loan and a mezzanine loan – amounting to £970m, taking the portfolio’s initial whole loan LTV to 85.6%.

The principal senior term loan was a £652m seven-year senior loan, from which RBS sliced off £572m and issued it as the Barchester CMBS under its EPIC CMBS conduit program.

This left a remaining non-securitised £86m loan from the original £652m senior loan, known as the A2 facility, along with a £192.8m stretched senior loan and a £119.0m mezzanine loan. All three facilities were all co-terminous with the senior, at seven-year terms.

RBS structured the two swaps to hedge both interest rates and the inflation risks association with the opco-propco RPI-linked leases, which took the form of a 24-year inflation rate swap and a 25-year interest rate swap.

Both swaps rank super senior to the securitised loan and RBS is the counterparty on both swaps.

Fast forward to the first quarter of 2013, Barchester’s entire outstanding debt against the 160-strong care home portfolio was £914.42m, including a securitised balance of £531.47m, at the end of last September.

By the same time, the A2 facility had amortised down to £78.04m, the stretched senior to £188.07m and the mezzanine loan to £116.47m.

The mark to market on the inflation rate swap, which still has 17 years to maturity, was £185.96m, while the 18-year interest rate swap liability is £276.84m.

The combined £462.8m hedging liabilities, together with the outstanding £914.42m debt, mean that Barchester’s total liabilities are £1.37bn, against a November 2011 re-valuation of the portfolio of £1.19bn.

Barchester’s “real” LTV, then, is 114.8%.

Effectively, sustained low interest rates and inflation have virtually removed all likelihood of an external refinance or portfolio liquidation, leaving a loan restructuring and extension as the only feasible outcome.

But the complexity of the restructuring deepens yet further.

Back in 2007 when RBS was seeking to exit the securitised bonds and non-securitised senior, stretched senior and mezzanine debt, the bank only managed to syndicate part of each of the non-securitised loans.

The remaining unsold portions – amounting to £123.8m – were all flipped into RBS’ sub-performing UK loan portfolio, Project Isobel, of which a 25% equity stake went to Blackstone in December 2011.

Last September, RBS securitised the remaining £463m balance of the loan which financed the RBS and Blackstone joint venture acquisition of the Isobel loan portfolio, selling £290m of the class A bonds and retaining the junior bonds.

Isobel held £26.7m of the A2 facility, £36.4m of the stretched senior loan and £59.7m of the mezzanine loan, at the end of September, according to Capita Asset Services, which is the loan servicer for Isobel Finance.

At the latest £1.19bn valuation, the value breaks in the stretched senior facility.

Given the complexity of the debt and equity structure of the original Barchester deal – in which RBS is both out-of-the-money through the junior Isobel Finance bonds and in-the-money in respect of the interest rate and inflation swaps – a restructuring and extension of the three loans is the most probable outcome by far.

One potential restructuring outcome could be the conversion of the junior debt into equity, similar to how RBS restructured the Four Seasons nursing homes-secured debt before the eventual high yield bond capital markets exit.

While swap liabilities will complicate discussions between the creditors, the opco and the propco, the operating business remains viable, with improving EBITDA figures and stable operating performance.

To achieve a three-to-five year loan extension, Barchester may have to concede a rental increase, which in turn would increase the cashflow in the deal, to enable the payment of higher coupons to bondholders. This, in turn, would improve the value of the real estate and lower the LTV.

The legal final maturity of the Barchester CMBS notes is in 2031.

Barchester appointed Goldman Sachs last summer to advise the UK care home operator on the probable restructuring negotiations in which RBS will be wearing several hats: RBS, the Isobel equity stakeholder, the Isobel Finance bondholder, the inflation and interest rate swap counterparty and the Barchester CMBS loan servicer.

Of course, Blackstone and the Barchester bondholders will also be present along with the unknown buyers of the £290m Isobel Finance senior bonds.

3. Woba: Gagfah opts for refi with BAML €1bn loan

Borrower: Gagfah

Issuing banks: Deutsche Bank/Lehman Brothers in April 2006

Deals: 50% in Deco 14 and Windermere IX

Remaining collateral: 46,309 units German multi-family residential units in 3,654 properties in Dresden at August IPD

Remaining balance: €1.03bn

Loan maturity: 15 May

Gagfah’s second major multi-family portfolio, the Dresden portfolio, looks set for a €1bn refinancing by Bank of America Merrill Lynch (BAML), with either a syndication or agency CMBS the most probable exit strategies which the US investment bank will be contemplating.

While Gagfah is yet to confirm the decision, which will be taken by the Board, the seeming refinancing over sale trajectory has been widely reported, including by Bloomberg and Reuters.

The €1bn refinancing would bring to a conclusion a concurrent strategy employed by the listed German residential company, in which Leonardo & Co was appointed to determine the feasibility of a sale of the Dresden portfolio, which was last valued at €1.7bn in the first quarter of 2012.

Gagfah maintained at the launch of that process to determine where price was that it would opt to refinance and hold if bids came in at a discount to the Dresden portfolio’s par value.

For BAML, the exit strategy chosen would indicate where the investment bank believes most demand is for German multi-family debt – in rated bonds, or loan book building insurance companies and German pfandbrief banks.

Last Spring, CoStar News reported that BAML had renewed its interest in a broad European commercial lending strategy to compete with the large US investment banks.

4. Tahiti Finance: GIC to leverage global relationships to secure timely Project Thirteen refi

Borrowers: GIC Real Estate, LBREP II, managed by Broadcliff, and Realstar

Issuing banks: Citigroup (agency CMBS) in December 2005

Remaining collateral: 61 Holiday Inn hotels valued at £870.2m by Christie and Co at 28 February 2012.

Remaining balance: £444.78m securitised (whole loan: £552.15m)

Loan maturity: 24 May 2013

GIC Real Estate, the majority equity owner in the property company which owns the 61-strong UK Holiday Inn portfolio, is expected to secure a £550m refinancing ahead of this May’s loan maturity.

Deutsche Bank was hired last September to run the refinancing, dubbed Project Thirteen.

GIC Real Estate, the driving force behind the refinancing, is seeking £400m in senior debt and £150m in junior debt, which would put the refinanced hotel portfolio at a 63.2% whole loan LTV, and a 45.96% senior LTV.

LBREP II owns the second-largest equity stake, followed by Realstar, the hotel portfolio property manager.

As a legacy Lehman Brothers’ real estate private equity fund, Broadcliff, the fund’s manager, is not a long-term holder of the remaining equity, which could potentially be sold to GIC, which has equity and mezzanine capital to deploy.

CoStar News understands that lenders considering taking some of the £400m senior debt include Deutsche Bank and AXA Real Estate, at a margin of at least 450 basis points, reflecting hotel pricing for secondary quality operating assets.

Whether GIC is prohibited from investing in the junior debt of its own equity transactions will determine whether the Singapore sovereign wealth fund takes some or all of the available £150m mezzanine ticket, thought to be priced between 850 to 900 bps.

GIC may leverage its global relationships to secure the refinancing, similar to how Malaysian pension fund Employees Provident Fund secured a £400m five-year senior loan from Standard Chartered in the sale-and-leaseback of 12 Spire Healthcare hospitals.

The two-to-three star Holiday Inn hotel portfolio is spread throughout central London, suburban South East markets, UK airports and provincial towns.

The current outstanding securitised balance is £444.78m which puts the senior LTV at 51.1%, based on Christie and Co’s £870.2m re-valuation last February. The whole loan LTV is 63.5%.

An anticipated successful refinancing at or around this May’s maturity will deliver a full recovery to bondholders and the junior lenders.

GIC, LBREP and Realstar bought the original 73-strong UK-wide hotels from InterContinental Hotels Group (IHG) in 2005 for £1bn.

5. Opera Germany (No.2): Blackstone buys 45% stake in Opera Germany propco from BAML adding twist to endgame

Borrowers: ECE, Blackstone and Middle Eastern investors

Issuing banks: Eurohypo in December 2006

Remaining collateral: 3 German shopping centres

Remaining balance: €560m securitised (whole loan balance: €608m)

Loan maturity: 20 October

Blackstone acquired a circa 45% equity interest late last year from Bank of America Merrill Lynch (BAML) in the vehicle which owns the three remaining German shopping centres, secured by the Opera Germany No. 2 CMBS, CoStar News can reveal.

The legacy Merrill Lynch equity position was sold to Blackstone late last year, while the original investor, ECE, the German shopping centre developer and investor owns 12%. The balance is held by three investors.

Hypothekenbank Frankfurt, the rebranded Eurohypo “bad bank” which is the special servicer, has been looking to dispose of the three remaining German shopping centres before this October’s extended maturity.

Back in December 2011, the then-still-Eurohypo restructured the CMBS loan with an agreed disposal plan in exchange for a two-year extension, which secured four shopping centres in the North-Rhine Westphalia region in Germany, extending maturity until this October.

With legal final maturity of the notes only 12 months later, Hypothekenbank Frankfurt has three of the four original shopping centres left to dispose of: the circa 53,400 sq m Ko Galerie in Dusseldorf; the circa 79,000 sq m Rhein-Ruhr-Zentrum in Mülheim an der Ruhr; and the circa 23,400 sq m Schwanenmarkt in Krefeld.

The Opernpassage shopping centre in Colone was sold by Peakside Capital for the equity partners for more than €63m at the end of last year, while the Rhein-Ruhr-Zentrum and Schwanenmarkt shopping centres have been marketed since October 2011, in line with a restructuring plan.

A significant refurbishment program for the CMBS loan’s second-largest asset by market value, the Ko Galerie, is expected to be completed by September, just one month before the loan’s extended maturity.

More than €60m of capex has been invested in the shopping centres – the majority into Ko Galerie – which is expected to materially increase the asset’s value, which could be Blackstone’s play.

With only a month from the completion of refurbishment works at Ko Galerie to the CMBS loan’s maturity, the shopping centre now could be a target for Blackstone to acquire, with the private equity firm then able to benefit from the upside in value generated by the capex investment while bondholders will be repaid in time for this October’s loan maturity.

This is more likely than the alternative, which would be enforcement or an asset sale beyond this October’s maturity through some level of further grace, or standstill period.

But enforcement takes a long time in Germany, and with the balance of power switching in favour of bondholders as legal final maturity nears. Bondholders at this stage are not interested in securing best price, but recovery of outstanding principal debt.

But the most probable outcome would be for Blackstone to take ownership of the shopping centres in which it sees most upside within the remaining pool.

The second part of CoStar’s Definitive guide to Europe’s largest 2013 CMBS maturities will be published tomorrow.

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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