A consortium of General Healthcare Group’s (GHG) junior lenders, led by private equity firm KKR, is lining up a fresh capital injection of around £175m into the outstanding £1.52bn debt stack, as the centrepiece proposal in a precariously balanced restructuring effort to recapitalise the 35-strong UK acute care hospital portfolio.
Under the proposals, the new five-year mezzanine loan would rank subordinate to the outstanding whole senior loan, currently at £887m, and senior to the unpaid junior loan, which now stands at £637.56m following Tuesday’s interest payment date (IPD).
The net proceeds of the proposed new subordinated loan would be used to pay down senior lenders – which include Barclays Bank and Rabobank – in an effort to economically motivate senior lenders against loan enforcement which would likely be value-decretive for junior lenders.
The exact size of the new mezzanine loan, the pricing, interest drawdown entitlement over the five-year term, as well as the allocation of the circa £175m capital down the senior waterfall are all negotiations between creditors over the next three to six months, in line with two three-month loan extensions confirmed by Capita Asset Services on Tuesday.
CoStar News understands that the quantum of the new mezzanine loan is likely to be £175m, give or take £1m or £2m, while pricing is expected to fall between 14% and 16%, on an IRR basis, with the loan expected to be predominantly, if not entirely, structured as a Payment In Kind (PIK) loan, thereby restricting cash leakage during the term.
Junior lenders’ proposals for the new subordinated loan are part of a wider five-year extension and restructuring of the £1.52bn debt stack which will be negotiated between all creditors – including the long-dated interest rate swap counterparty, also Barclays – following the original maturity of the senior loan this week.
Capita, the master servicer for the entire senior loan, notified all lenders on Tuesday that a three-month loan extension option to 15 January 2014 had been approved, in order to conduct the complex negotiations, with a proviso that a second three-month loan extension, to 15 April 2014, would be sought, if required.
While all the legacy junior lenders will be invited to participate in the new mezzanine loan, relatively few of the dozen separate junior investors in GHG are expected to do so.
KKR, the global private equity firm which acquired around a £100m position in the GHG junior debt around 18 months ago at around a 40% discount, through its Special Situations Fund, is expected to be one of the lead buyers, alongside D.E. Shaw, the New York-based hedge fund.
FMS Wertmanagement, the bad bank which spun out of Hypo Real Estate, is also thought to still own a considerable stake in the GHG junior debt, but is expected to be unable to “double down” on its existing commitments given its strict regulatory-defined remit to deleverage its balance sheet.
The junior lender consortium, in exchange for paying down senior lenders, is seeking to protect the economic value in their outstanding aggregate £637.56m junior loan with an extension of the entire £1.52bn debt stack by five years.
Crucially, under the proposed terms, during this five-year loan extension there can be no property disposals which would be considered value-decretive to junior lenders.
Junior lenders have offered this fresh capital, arguably, to avoid a situation where the senior lenders are prepared to accelerate the loan, crystallising the interest rate swap breakage costs, and follow an accelerated divestiture programme of the 35 UK hospitals.
The senior lenders, potentially, could be motivated to do so, although there are valuation and even political considerations to reflect on.
Capita has ordered a new valuation of the 35-strong hospital portfolio, which is due by 15 November.
The realisable value of the hospitals could be markedly different dependent upon the circumstances of the disposal. Even if the new valuation comes back higher than the existing £1.45bn desktop valuation dated to September 2012, an enforced piecemeal sale of the assets could deliver lower sales prices and, therefore, a sub-optimal capital recovery for junior lenders.
In addition, the mark-to-market (MTM) on the long-dated interest rate swap over the GHG loans, which mature in 2031, have fallen from a high of £577m in September 2012, to the low £400m-range today, driven by rising long term interest rates. This current dynamic, however, could easily reverse over time.
The swap breakage costs rank super senior, meaning the swap counterparty would get paid out ahead of the senior lenders. But in a scenario where the swap MTM is £400m, and the entire senior whole loan is at £887m, the new valuation need only come in at circa £1.3bn for all senior lenders to be covered in the event of a non-value maximising enforcement option.
The new circa £175m mezzanine capital by the junior lenders is not enough to motivate the senior lenders into keeping their economic interests alive.
At which juncture, the wider set of proposals to economically motivate the senior lenders come into play, which specifically will be around margin step ups for the rated senior notes and loans, as well as amortisation schedule and agreed disposal timeline.
Potentially, Barclays’ role in a potential enforcement action over 35 private UK hospitals could have political ramifications, particularly given the fallout from the collapse of Southern Cross.
See below for a comparison of the original and present GHG capital structure.
As ever with CMBS restructuring proposals, the outcome is never certain and this is arguably an even more complex, multi-party negotiation than Deutsche Annington’s GRAND CMBS restructuring talks.
Ambac and Barclays agree private settlement
The very fact that even broad terms of a potential restructuring were outlined by Capita, which has appointed Lazards as its financial adviser, is itself a significant positive for all parties, given the extraordinary contest in the High Court’s Chancery Division in mid-August.
Barclays Bank, the majority securitised senior debt holder across T1 and T2, argued in the High Court’s hearing, overseen by maverick Judge, Justice Peter Smith, that the voting powers of its collective senior debt holdings had been “disenfranchised” and therefore without authority in the upcoming restructuring negotiations and eventual vote.
Barclays’ attempt to disempower itself – an 11th hour u-turn based on its submissions to the High Court prior to the hearing – was an ill-disguised, last-ditch attempt to circumvent the transfer of voting power to Ambac, the structured finance hedging specialist.
Barclays, which owned £231m of class A notes and £57m in class B notes in T1 at the time of the hearing, secured credit default protection against £173.4m of Barclays’ T1 class A notes and a guarantee against the remaining £56.7m.
In addition, Rabobank held £154m class A position in T2 which was covered both by a total return swap (TRS) arrangement with Barclays, which Barclays, in turn, secured by credit default protection contract with Ambac.
Barclays feared that if it argued that its voting rights remained intact, then it would legally follow, that the directive power of those votes would transfer to Ambac, under the terms of their separate hedging contracts. And it was clear that Barclays and Ambac’s interest in respect of how to vote in the upcoming restructuring talks were opposed.
Justice Peter Smith saw through Barclays 11th hour change of strategy, which he described as a “somersault”, and ruled in favour of Barclays’ retaining their voting rights, which subsequently were controlled by Ambac.
However, subsequent to the 28 August judgment, CoStar News understands that a private agreement has now been reached between Barclays and Ambac, to the effect that Ambac no longer controls Barclays’ voting direction.
For CoStar News’ full analysis of Justice Peter Smith judgement and background to the case, please click here.
GHG capital structure: 2007 original Vs October 2013 IPD
Netcare acquired GHG in 2006 for £2.4bn, financed by £660m in two CMBS transactions – the Theatre (Hospitals) No. 1 and No.2 CMBS (T1 & T2) deals at £396m and £264m, respectively, issued by Barclays Bank, Bank of Scotland, Dresdner Bank and Mizuho Corporate Bank.
The Propco loans were backed by 36 hospital properties and equipment operated by hospital group BMI.
In addition, Netcare secured a further £300m in pari passu senior loans provided by the same four banks and £690m in subordinated junior loan, which was syndicated widely.
The overall total £960m whole senior loan was rated from AAA to BBB accordingly, with the non-securitised senior lenders effectively each taking a vertical slice.
At the outset, the original capital structure was as follows:
- AAA – £385m in T1 and T2 plus £175m, priced at 41 bps
- AA – £95m in T1 and T2 plus £44m, priced at 46 bps
- A – £90m in T1 and T2 plus £41m, priced at 70 bps
- BBB – £90m in T1 and T2 plus £40m, priced at 95 bps
- Subordinated debt – £690m
The whole senior loan, therefore, was £960m plus the £690m subordinated debt totals £1.65bn. In addition, there was an original £215m in Opco debt and £536m in equity, based on the original DTZ valuation of £2.15bn.
The pre-global financial crisis low coupons on the bonds clearly afford ample room for re-setting today’s expectations for bondholders.
Over the almost five-and-a-half years to mid-October 2013, and yesterday’s IPD, the entire outstanding debt has amortised proportionally to 92.4% of the original, which indicates that the current debt stack is as follows:
- AAA – £355.74m in T1 and T2 plus £161.7m;
- AA – £87.78m in T1 and T2 plus £40.66m;
- A – £83.16m in T1 and T2 plus £37.88m;
- BBB – £83.16m in T1 and T2 plus £36.96m;
- Subordinated debt – £637.56m.
The senior capital stack above reflects the vertical slice across the whole senior loan. Breaking down the outstanding balance of the senior components individually, implies the following unpaid senior balances as at Tuesday’s October IPD:
- T1 is £365.9m;
- T2 is £243.94m;
- Non-securitised senior is £277.2m
- Current super senior swap MTM est. at “low £400m” range
GHG is today owned by Netcare, the listed South African care home operator, APAX Partners and London & Regional.
All partied declined to comment.