The prospective sale of NHP Group, the property company which owns 282 UK nursing homes valued at around £450m, is back on track after a High Court judgment published yesterday afternoon rejected Anchorage Capital’s claim as the “controlling party” in the securitisation transaction.
Mr Richard Snowden QC, sitting as a Deputy Judge of the High Court, ruled that the issuer of the Credit Suisse-issued Titan Europe 2007-1 (NHP) Limited securitisation was the rightly “controlling party” and not Anchorage Capital, the class E note holder, as was argued by the private equity firm’s legal counsel.
Mr Snowden’s ruling paves the way for either the direct portfolio sale of NHP’s 282 former Southern Cross nursing homes, the property-owning companies themselves or the property-owning companies and the trading operations.
JLL provided separate valuations for each, dated to the end of December 2013, which came in at £426.7m, £443.1m and £529m, respectively.
Whichever valuation is applied, this represents a dramatic fall in value from the 31 January 2007 valuation of £1.34bn.
In addition, the mark-to-market breakage costs of the long-dated interest rate swap were £124m at mid-January, according to Capita. There is also a further £73.8m of swap payment arrears due to the swap counterparty, which has risen to £86m and is expected to continue rising, taking the total swap payments to £210m.
The judgment confirms that the £86m and rising arrears payments also rank ahead of the class As, which would imply a partial loss for the class As even if a sale achieves nearer the whole company valuation of £529m.
In total, the outstanding whole loan balance is £1.17bn, including an unpaid £610.17m senior loan.
Capita Asset Services, the special servicer over the Libra Whole Loan, the sole loan in the Titan Europe 2007-1 (NHP) Limited CMBS, launched the “exit strategy” for the nursing home property portfolio in September 2013, appointing Deutsche Bank to run the process.
Anchorage Capital, which last year bought the £60m class E notes at a deep discount to par value, sought to challenge Capita’s planned NHP sale process by attempting to terminate the special servicer in February and installing Mount Street as the replacement.
Had Anchorage Capital been successful in installing Mount Street, the likely mandate would have been to protect and revive the economic value of junior note holders through the suspension of the current Deutsche Bank-managed sales process.
But yesterday’s published judgment effectively ends that challenge, in a victory for Och-Ziff in particular which CoStar News understands is the unnamed class A note holder in Titan Europe 2007-1 (NHP).
Patron Capital, Duke Street, Four Seasons, Formation Healthcare and Fondia Investment Management are all expected to have lodged proposals last week, which are under review by Deutsche Bank and Capita.
The High Court proceedings were originally brought by the note trustee, US Bank Trustees Limited, to secure clarification over Anchorage’s attempt in February to unseat Capita as special servicer.
Under the terms of the securitisation documentation, in order to replace Capita as special servicer, the transaction’s three rating agencies – Standard & Poor’s, Fitch Ratings and Moody’s – had to provide a rating agency confirmation (RAC) from each to confirm that a special servicer switch would not result in a downgrade of the bonds.
This was complicated by Fitch’s EMEA-wide policy on CMBS transactions to no longer provide RACs for servicer replacements, as first communicated on 10 December 2012 – an issue which has caused much consternation in the European CMBS market ever since.
This issue along with, inter alia, US Bank Trustees’ role in approving the successor special servicer and the mechanics of an orderly transition, were all secondary considerations by Mr Snowden, who determined that the identity of the “controlling party” was of primary importance.
The arguments, and counter-arguments, put forward by the legal counsel for Anchorage Capital and Och-Ziff centre around the interpretation of definitions across the original prospectus for Titan Europe 2007-1 (NHP), also known as the offering circular, and the subsequently drafted serving agreement.
Much of the argument centred on interpretations of the documents, which in part appeared conflicting, with the legal powers of various stakeholders unclear as result. For the entire judgment, please click here.
Mr Snowden wrote: “In my judgment, although the points raised by Mr. Trower [counsel for Anchorage Capital] have force, I think that Mr. Hill’s [counsel for Och-Ziff] points make at least equal commercial sense.
“I therefore cannot conclude that the result that is required by the ordinary meaning of the words of the servicing agreement is one that is commercially absurd. Nor can I otherwise be sure that a mistake has been made in the drafting of the Servicing Agreement rather than the offering circular, so that the parties to the Servicing Agreement must have had the intention contended for by Mr. Trower.
“In particular, Mr. Trower was unable to … explain to me the commercial logic of why the transaction should have provided for the role of controlling party to move up the tranches of the subordinated B loan as those tranches fell successively underwater…”
Mr Snowden ruled that in absence of a clear explanation to this point, “it seems to me that it is equally, if not more, commercially rational for the parties to the servicing agreement to have intended that if the position had been reached that all of the subordinated B loan was underwater, the controlling party should be the party which had made the Libra Loan to the borrower” – which is the issuer of the transaction.
Mr Snowden concluded: “In the result, I conclude that in the present situation, the servicing agreement provides that the controlling party is to be the issuer, and not the controlling class representative of the class E notes.”
Based on the two separate JLL valuations of the NHP property portfolio, there final recovery to the class As will depend on which permutation of sale options is realised, with the outcomes ranging from full recovery for the As to a modest loss, subject to the final swap payment which are in arrears.
The outlook for the class B note holders is for a significant loss, while the class C, D and E notes as well as the subordinated B loan lenders, are now expected to be out of the money.