Deutsche Annington has agreed a €2.5bn unsecured bridge loan with JP Morgan and Morgan Stanley to fully repay the outstanding GRAND CMBS loan balance by October, ahead of a likely smaller BBB-rated corporate bond issuance to facilitate a broader group-wide de-leveraging strategy in line with its targeted Frankfurt IPO in the first week of July.
JP Morgan and Morgan Stanley have agreed to provide the €2.5bn bridge loan to enable Germany’s largest privately held multi-family residential company to seek bondholder approval to repay the remaining GRAND CMBS debt by either the July or October interest payment dates (IPD).
Deutsche Annington, owned by private equity firm Terra Firma, will then issue an unsecured corporate bond, likely using the majority but not all of the proceeds of the JP Morgan and Morgan Stanley bridge loan.
The impending €1bn-plus corporate bond issuance will be secured only by Deutsche Annington’s profitability, for which investors have a preliminary BBB-rated guidance from Standard & Poor’s sole rating.
Standard & Poor’s preliminary rating reflects the rating agency’s assessment of Deutsche Annington’s “strong” business risk profile and its financial risk profile as “significant”.
Deutsche Annington owns more than 180,000 residential units in Germany – located predominantly in Nordrhein Westphalen, Hesse, Bavaria and Baden-Wurtenberg in West Germany – valued at €10.4bn at the end of March, and an aggregate annual rental income of €729m
Standard & Poor’s, in its preliminary rating published this morning, wrote: “In our view, DAI should continue to benefit from stable rental income and resilient asset values for its residential property portfolio.
“We base our view on favourable demand-supply trends in most of DAI’s geographical locations, and its track record of low vacancy rates and continuous rent increases on new lettings.
“Under our base-case scenario for 2013, we forecast like-for-like net rental income growth of 2%, a lower average cost of debt, and a slightly positive asset revaluation. Rating stability over the medium term depends on DAI maintaining an interest coverage ratio of more than 2x and an adjusted debt-to-capital ratio of 60% or less. We estimate that DAI should be able to achieve these metrics in 2014.”
GRAND CMBS noteholders will be repaid in full by no later than 21 October, subject to no material worsening in prevailing market conditions.
Deutsche Annington’s preference for an unsecured facility to complete the refinancing of Europe’s largest-ever CMBS is to align its debt profile with customary 50:50 group-wide split between secured and unsecured lending.
By issuing a corporate bond, Deutsche Annington opens up to a wider universe of investors, compared to Europe’s still relatively shallower returning CMBS investor base.
Corporate bonds are also considered overall easier to execute, in terms of regulatory compliance with no 5% “skin in the game” Capital Requirements Directive (CRD) requirements, and broadly speaking, there is a more efficient relationship with end debt investors, with no master servicer required.
The €2.5bn bridge loan, together with a five-year €715m Berlin Hyp loan and a senior debt consortium of insurance, pension funds and mortgage banks together providing a further €940m will see GRAND noteholders entirely repaid by this July’s IPD, or the October IPD at the latest – in the first year of an originally planned five-year refinancing schedule as outlined in July 2012.
For the unnamed group of senior lenders providing a total of €940m, all in separate ring-fenced pools, CoStar Newsunderstands that Deutsche Annington requested term sheets from all open for business German pfandbrief banks, including pools signed by Deutsche Pfandbriefbank, Heleba, LBBW and Aareal Bank, as well as international insurance lenders, including AXA Real Estate.
These separate facilities will be signed either in time for the July or October IPD.
Deutsche Annington plans to issue its IPO Prospectus within the next two weeks, which will likely include details of the exact size of the corporate bond issuance, together with the amount of targeted de-leveraging ahead of the company’s floatation.
Deutsche Annington plans to raise around €400m from the sale of new shares at the IPD, with the proceeds used to strengthen its balance sheet.
JP Morgan and Morgan Stanley are Deutsche Annington’s joint global co-ordinators and joint bookrunners, while Bank of America Merrill Lynch and Deutsche Bank are joint bookrunners, and Berenberg Bank and Kempen & Co are as joint lead managers.
Commerzbank, Erste Group Bank and Société Générale Corporate & Investment Banking complete the IPO ticket as co-lead managers.