Anchorage Capital, the US private equity firm, yesterday afternoon published an 11th hour counter proposal to bondholders in a CMBS transaction secured by NHP Group’s 282-strong former Southern Cross nursing homes, in a last ditch effort to delay the impending sale of the operating company, HC One Limited.
Credit Suisse International, the originator of the Titan Europe 2007-1 (NHP) Limited securitisation seven years ago and interest rate swap provider, has offered a 30% haircut on the mark-to-market (MTM) swap liability.
The current MTM swap liability is £115.3m, according to the April investor report issued by special servicer Capita Asset Services, which currently implies £34.6m in debt forgiveness.
The MTM liability, however, is expected to continue to decrease driven by the twin drivers of the approaching interest rate swap maturity, on 15 January 2017, and markets’ strengthening expectation of future interest rate rises.
Notably, this haircut offer by Credit Suisse is not extended to the disputed arrears swap liabilities. These unpaid swap payments, calculated at £75.6m by Capita and £90.6m by Credit Suisse, are the subject of lingering ambiguity over their seniority – the liabilities either rank above or below the class As.
Anchorage and Credit Suisse’s proposal offers to end this ambiguity and subordinate the swap payment arrears below the class As.
In addition, surplus rental payments, after structure costs and to-be-agreed capex, as well as surplus A and X note interest would also be re-directed to amortise the class As.
In exchange, Anchorage is seeking the postponement of the sale of the NHP nursing home operating company, HC One Limited, for which offers have been received from Patron Capital, Duke Street, Four Seasons, Formation Healthcare and Fondia Investment Management.
Deutsche Bank, which has been appointed by Capita to advise on the sale of HC One Limited, is reviewing the bids.
This is the second attempt by Anchorage to prevent the immediate sale of the nursing home portfolio, after a High Court judgment last month ruled against private equity firm’s claim to be the “controlling class” in the nursing home-backed CMBS deal, Titan Europe 2007-1 (NHP) Limited.
The High Court ruling, which decreed that the issuer was the controlling class, halted Anchorage’s initial strategy to block the sale of the nursing home portfolio through replacing Capita Asset Services, the special servicer which has orchestrating the sale on behalf of bondholders, with Mount Street.
Anchorage last year bought the £60m class E notes in the NHP CMBS at a deep discount to par value and is seeking to protect its economic interest through a delayed sale of the portfolio to allow capex investments, and broader market improving fundamentals, to feed into the recovering NHP Group’s operating business.
Credit Suisse International and Anchorage Capital Europe, the sub-adviser to Anchorage Capital who owns the class E notes in NHP, jointly hosted a presentation to noteholders yesterday, at which it was stated: “We strongly believe that the full benefits of the investments made by the Borrower take time to feed through into business performance and to generate significant additional value.
“We will continue to encourage Capita to make disclosure of half-year results to March 2014 to provide further clarity on this issue. Taking this into account we believe Capita’s commitment to explore an immediate sale of the business, a process which it has confirmed is continuing at this date does not maximise the value of the Whole Loan and is not in the best interests of all creditors.”
While Anchorage’s motives for seeking to delay the sale of HC One Limited are clear, the proposals have not been received favourably by class A noteholders, CoStar News understands, given the lack of an initial structured paydown on day one or a coupon step-up.
There are thought to be as many as 10 separate noteholders in the £435.85m class As, including a majority stake held by Och-Ziff which CoStar News understands was the unnamed noteholder involved in the High Court legal action last month.
Anchorage argues, in the script from yesterday’s presentation to noteholders, that its proposal offers improved certainty and downside protection for the class A noteholders, for which the unpaid balance is now £408m, through the subordination and haircut on the MTM swap liability.
Resolution of the ambiguity over the swap arrears liabilities – whether £76.6m, as stated by Capita, or £90.6m, as calculated by Credit Suisse – is the crucial determinant here.
Capita confirmed on Monday that it had requested the views of the NHP CMBS transactions’ cash manager, which is the entity responsible for administering payments by the Issuer.
If the cash manager were to determine that the swap arrears liabilities were subordinate to the class As, these noteholders would not require this consensual deal and could realistically expect par recoveries. This would crystallise a considerable profit for many noteholders which bought at between 70 to 85 pence in the pound.
However, in this scenario, Credit Suisse could choose to seek a legal ruling, which would potentially be protracted and costly. Credit Suisse’s motivation for securing a consensual agreement would avoid potential legal disputes and uncertainty while also seeking to achieve maximum recoveries.
If the cash manager, or a subsequent legal ruling, determined that the swap arrears liabilities were senior to the class As, these noteholders full recovery would be less certain.
The NHP 282-strong former Southern Cross nursing homes property portfolio was valued by JLL at the end of 2013 with three differing levels of security. The direct nursing homes assets were valued at £426.7m, the property-owning companies were valued at £443.1m, while the property owning companies and trading operations were valued at £529m.
It is not clear whether JLL’s valuations were based on HC-One Limited’s projected £41m EBITDA or the full year realised improved figure of £48m. If the former, the above valuations are each undervalued.
Regardless, for the class As to achieve full repayment of their combined £408m outstanding balance, the sales price would have to be a minimum of approximately £435m if the swap if fully subordinated and £530m if the swap arrears liabilities are senior, based on Credit Suisse’s swap arrears estimates, according to calculations provided to CoStar News.
These calculations are inclusive of approximately £14.7m in accrued advances made by predominantly borrower-led costs and a 1% liquidation fee plus VAT payable to the special servicer, plus estimated fees which would be due to Deutsche Bank for advising on the sale of HC One Limited and legal fees.
All parties declined to comment.