MetLife has negotiated a £126m three-year whole loan to finance Canary Wharf Group’s re-purchase of 15 Westferry Circus in Docklands out of administration, in an unusually highly-leveraged deal structured to burn-off the long-dated interest rate swap and prevent crystallising steep losses in the legacy junior loan.
This extremely atypical financing deal reflects a unique solution to a complex series of problems associated with the legacy financing and the previous owner, Vico Capital, which held the Docklands property through a special purpose vehicle (SPV).
CoStar News understands that MetLife led the effort to broker the high LTV acquisition finance deal to protect its own economic interest in the remaining £31.47m B-note beneath the £94.89m Westferry Circus loan, both as at the April IPD, with the latter securitised in the Morgan Stanley-issued Radamantis ELoC No. 24 CMBS in 2006.
The original Morgan Stanley £131.26m six-year whole loan, which matured in April 2012, was originated alongside a 10-year interest rate swap, which still has just under three years left to run until maturity in April 2016.
MetLife’s motivation to protect its legacy junior loan exposure led the insurance lender to seek the acquisition financing from Canary Wharf for 15 Westferry Circus.
But the solution was complicated further still.
Vico Capital, founded by Dublin solicitor-turned-property investor Brian O’Donnell and his wife Mary Pat, acquired 15 Westferry Circus in March 2005 for £134.75m, through an SPV called Hibernia (2005) Limited, financed with £131.26m a Morgan Stanley six-year whole loan.
Hibernia’s Westferry Circus loan matured in April last year, eight days ahead prior to the loan maturing, Morgan Stanley Mortgage Services transferred the loan into special servicing, anticipating a default at maturity given that bankruptcy proceedings has already been issued against O’Donnell and Pat.
Morgan Stanley Mortgage Services subsequently mandated Savills’ Julian Clarke and Annabel Sutherland as joint fixed charge receivers on 7 August last year who then brought the asset to market last autumn with a £129.5m guide price.
However, with O’Donnell and Pat seeking to appeal their bankruptcy order, there remained a possibility that Vico Capital could stifle Canary Wharf’s intended acquisition, which was deemed could legally be negated through the appointment of administrators, instead of the existing receivership route for which Savills were appointed.
Morgan Stanley Mortgage Services therefore appointed Ernst & Young’s Benjamin Cairns and Alan Bloom on 24 May this year, to side-step the potential sale disruption.
Concurrently, MetLife, Canary Wharf and Morgan Stanley Mortgage Services reached an agreement change the original 10-year interest swap counterparty, Morgan Stanley, with a new legal entity, a new borrower SPV ultimately controlled by Canary Wharf as purchaser.
This required an agreement to novate the existing swap contract agreement.
Essentially, while all the material parties had changed – with a new senior lender, new borrower and new swap counterparty all in place – the existing interest rate swap contract remained in place, supressing the swap breaking costs upon change of ownership of the property.
This workaround has allowed MetLife to originate a fresh whole loan, repaying the outstanding £94.89m Westferry Circus senior loan and retire the £31.47m B-note, which MetLife itself holds, on Monday, for a three-year duration loan allowing the remainder of the interest rate swap to burn off.
While the leverage is way beyond MetLife’s usual appetite, and the 3% equity stake is significantly below a traditional Canary Wharf equity participation, the solution reflects an intelligent and logical workaround and a significant level of co-operation by all parties to negate an unnecessary erosion of junior capital – all due to an ill-conceived mismatched interest rate swap devised seven summers ago.
In three years’ time, no doubt, a fresh MetLife senior loan – reflecting MetLife and Canary Wharf’s traditional risk appetite – will refinance this unusual, but clever, whole loan.
All parties declined to comment.