Toys R Us has priced and closed the re-securitisation of its 31 UK-wide retail stores and distribution centre, as cornerstone bridge loan underwriter PIMCO, along with a minority stake by Marathon Asset Management, convert their £263.16m bridge loan into seven-year Debussy DTC CMBS notes at par.
CoStar News understands that PIMCO has acquired the entire £184.2m class As and £52.6m class Bs, while Marathon has taken majority of the £26.3m class Cs – all less a vertical 5% retention by Toys R Us, in compliance with the post-crisis EU 5% “skin in the game” Capital Requirements Directive (CRD) for banks and investment firms.
PIMCO is expected to partially trade out some its exposure in Debussy in the secondary markets.
Toys R Us, jointly-owned by Bain Capital Partners, Kohlberg Kravis Roberts & Co and Vornado Realty Trust, refinanced the Vanwall Finance CMBS on 28 March, which today converts at the following fixed rates: 5.93% for the class As; 8.25% for the class Bs and; 10.5% for the class Cs.
The blended cost of debt for Toys R Us’ refinancing, including the borrower’s CRD retention is 6.85%, according to CoStar News’ calculations.
The fresh Debussy CMBS reflects a number of firsts for European securitisation, as well as a creative solution in response to a still much-depleted market for new liquidity facility agreements.
Debussy CMBS is the first non-bank structured European CMBS, arranged by Cairn Capital, agreed between capital market investors, PIMCO and Marathon, and the borrower Toys R Us direct, with no bank in the middle.
Furthermore, it is the first European CMBS which, at issuance, does not include a AAA tranche, with the secondary quality of the portfolio such that the most senior rating was A- by Standard & Poor’s and BBB-low, by DBRS.
Both the class Bs and Cs are unrated.
PIMCO and Marathon negotiated a £19.3m reserve account with the borrower as credit for the transaction.
However, a third party liquidity facility could not be sourced, largely owing to the enduring difficultly in sourcing such facilities in banking markets since the global financial crisis, due to the changing regulatory landscape which makes the cost of their provision an onerous cost for both borrowers and banks.
Deutsche Bank’s £380m Chiswick Park transaction, DECO 2013-CSPK CMBS, which priced six weeks ago, was structured without a liquidity facility, which, in part, explains the lack of ratings on that deal.
In the absence of a liquidity facility, the originally negotiated reserve account, to support all three classes of notes, was renegotiated by Cain Capital to be utilised as a liquidity facility first and foremost for the class As.
PIMCO and Marathon’s quid pro quo was a slight uptick in fixed interest rates on the notes.
The work around is an important feature for the new issuance transaction, given that the Debussy was arranged by a non-bank which could not draw on its own capital base as a last resort, as an issuing investment bank could have opted to do.
Banks are not currently motivated to comply with the new regulatory environment to support liquidity facilities, given the new onerous regulatory and capital requirements and, furthermore, banks have long memories of being burned from legacy liquidity facilities in pre-crisis transactions.
One notable example is the continuing exposure faced by Danske Bank for its liquidity facility provided to Barclays Capital’s Gemini CMBS, which still retains a circa £30m outstanding liability with a structure which leaves the bank more exposed than, perhaps, it is comfortable with.
The 1.87m sq ft Toys R Us portfolio is of secondary quality, owned within an opco-propco structure delivering an annual passing rent of £23.0m, comprising of 30 retail stores and a distribution centre in Coventry collectively valued at £315m, according to 20 March-dated valuation by CBRE. The vacant possession value is 38% lower, at £194.51m.
The Coventry distribution centre is the highest valued asset, at £42.5m, with the remaining granular portfolio valued at between £3.2m and £17.5m.
Every asset has 30-year occupational lease, maturing in February 2036, except one lease which expires February 2037. All leases are subject to five-yearly upward-only rent reviews.
Debussy CMBS matures in July 2020, with a five-year tail period to the legal final maturity in July 2025. Beneath the CMBS are £80.2m in subordinated intercompany loans.
While the Debussy CMBS is rated, the securitisation is similar to the Tesco Finance series of credit-linked transactions in that noteholders are chasing the corporate credit of the tenant, Toys R Us, in their rationale for investment.
While the portfolio is fully let, and each asset on 30-year leases, the Toys R Us business model has come under some strain in recent years, as online competition for retailers has eaten into market share.
Situs Asset Management, which now manages more than €22bn of commercial real estate debt through its European platform, is the master servicer.
Bruce Nelson, chief operating officer of Situs, said: “As European markets stabilise, investors are looking for growth, so it is inevitable that the focus will start to shift from prime assets to secondary assets.
“With the introduction of the Debussy DTC PLC CMBS transaction, hopefully we will see this kick-start the financing of other challenging asset classes, and show an evident recovery in the European securitisation markets.
“In conjunction with Cairn Capital, we are working to help our industry and the market by being flexible and innovative in adopting new structures, taking on more responsibilities, and providing better reporting and transparency to the market, helping instil confidence.”