Kennedy Wilson has offered around €305m in an all-cash bid to win the former Treasury Holdings’ 16-strong Castle Market Dublin City office property portfolio, edging out a very close rival cash-bid by London & Regional and Northwood Investors’ CMBS restructuring proposal.
All three bids came in above €300m in one of the most narrowly-won portfolios in recent times, in a decision which is yet to be rubber-stamped for approval by bondholders in the outstanding €368.4m matured Opera Finance (CMH) CMBS.
The sale of the portfolio, ran by Cairn Capital at the appointment of special servicer Hypothekenbank Frankurt, does not require the approval of the owner of the junior lender, held by rival bidder Northwood Investors, which acquired the €85m B-Note for around €100,000 from NAMA at the turn of the year in an effort to gain a strategic advantage in the sales process.
Based on an outstanding whole loan balance of €453.4m, a sale at circa €305m would crystallise bondholder losses – net of Cairn Capital and Hypothekenbank’s fees – into the €50m class Bs, the extent to which will be dependent upon a resolution over who bares liability for the embedded capital gains tax.
However, Hypothekenbank and Cairn are recommending repayment on a pro rata, rather than sequential repayment, which would see the class As share in the losses alongside the junior bondholders, who would at least get some modest capital recovery.
The €305m sale price reflects a 32.7% discount to the outstanding whole loan balance and a 12.8% premium to the last public “internal” valuation for the Castle Market portfolio of €270.4m, dated 15 months ago.
But this valuation is out of date, failing to capture the fragmented uplift in values within Dublin’s prime City office market, in which sub-sector a select liquidity is returning.
This is exemplified by this fiercely-contested portfolio sale, as well as in non-performing loan portfolios, projects Kildaire, Lane, Pittsburgh and Aspen, and Kennedy Wilson’s acquisition of State Street’s Dublin headquarters, at 78 Sir John Rogerson’s Quay, from RBS’ Ulster Bank for €108m – reflecting a 10% discount to the loan’s €120m outstanding loan balance.
The returning liquidity is modest, but there has been a building momentum in Ireland over the last six months that now is a good time to get into Dublin with a view that, when a recovery does fully manifest, it will start in the capital’s office market. Some investors have already called the bottom of the market.
A more recent non publicly-disclosed valuation of the Castle Market Dublin office property portfolio valued the 16-strong portfolio at similar level to the €305m sale price.
The issue of embedded capital gains tax liability remains, specifically who bears the burden bondholders or Kennedy Wilson, and whether it is based on the price at portfolio purchase – which was around €500m, reflecting a liability of €52.16m – or proportional to the portfolio’s current €305m value, reflecting nearer €20m.
Hypothekenbank, which will name a date for an extraordinary resolution before the end of the month to pass its Kennedy Wilson sale recommendation, is also proposing to bondholders the appointment of Ernst & Young’s David Hughes and Luke Charleton as joint receivers over the Castle Market portfolio.
Conceivably, a rival 11th hour counter offer could still be forthcoming, given the closeness in price between the three bids, the lack of clarity over who owns the embedded capital gains tax liability, and the fact that deciding bondholders only have loyalty to the maths and economics.
Simply put, the bid which reflects the greatest recovery for bondholders will win.
Cairn Capital required the shortlisted three finalists to include fully committed cash-only bids, to negate the restructuring blocking vote which Northwood Investors, as the junior loan owner, held.
Northwood Investors could have rejected any rival restructuring proposal, which effectively precluded any viable alternative sale of the portfolio’s debt via the existing securitisation other than its own.
While Cairn Capital, therefore, insisted on fully committed cash-only bids, Kennedy Wilson is likely to finance the acquisition post the closure of the deal, given the capital inefficiency in writing a €305m equity cheque.
For Kennedy Wilson, the Castle Market portfolio would be an important return to winning ways, after recently losing out on Lloyds’ Project Thames, which is to trade with Cerberus, and Project Panther, the Britannica Shopping Centre Fund, which was won by Praxis Real Estate.
Intriguingly, Kennedy Wilson will be weighing up its options as to whether it will finance the Castle Market portfolio in the senior lending market, or through a new issue CMBS, with a likely willing bond investor base in the Opera Finance (CMH) CMBS already comfortable with the asset management and Ireland recovery story.
An extraordinary resolution has to be negotiated first.
Details of the three rival shortlisted bids, and the assets within the portfolio, are covered here.
All parties declined to comment.