Morgan Stanley funds two-tranche £350m Mall Fund refinancing

Morgan Stanley has closed the refinancing of The Mall Fund with a £350m senior loan enabling the repayment of bondholders in the existing CMBS at par, Capital & Regional announced this morning.

Morgan Stanley (correct)The Mall Fund, which is circa 50% and 30% owned by Aviva Investors and Capital & Regional respectively, is secured by six UK-wide shopping centres which were valued at £684.65m last December.

CoStar News first reported that Morgan Stanley had won the £375m refinancing mandate – inclusive of a £25m capex facility – in mid-March beating underbidder M&G Investments which also submitted a full term sheet, on an originate-to-hold basis.

In addition, an unfinalised club consortium of lenders comprised of Helaba, RBS, Wells Fargo and Deutsche Pfandbriefbank also bid on the refinancing mandate, in a process dubbed Project Maple, as well as Lloyds Banking Group which offered to underwrite the entire deal before syndication.

However, shareholders of The Mall Fund were keen to ensure a tighter control over its ultimate creditors were following  its experience in seeking a 2010 restructuring of its defaulted CMBS loan in the aftermath of the global financial crisis.

Morgan Stanley is understood to have agreed that the loan will not be securitised and is expected to retain the majority, if not all, of the new £375m facility.

The legacy CMBS loan will be settled from a combination of both the new £350m term loan along with an associated £10.67m interest rate swap liability triggered on repayment, from The Mall Fund’s existing cash resources.

Morgan Stanley’s facility is comprised of two tranches:  a fixed rate tranche of £233.3m with interest fixed at 1.86% plus applicable margin; and a floating rate tranche based on three-month LIBOR of £116.7m.

The latter tranche will be hedged using an interest rate cap at a strike rate of 2.75%. The capex facility will also be at the same floating rate and interest rate hedging on this element of the facility will be determined as it is drawn down.

The initial margin on all elements of the facility is set at 1.9%, in line with CoStar News reporting almost three months ago, but the margin is dependent upon the LTV ratio. The margin would increase by 25 bps if the LTV were to exceed 60%. However, it would fall by 15 bps if the LTV were to reduce to 45%.

There is a commitment fee on the undrawn element of the capex facility of 40% of the prevailing margin. Assuming that the capex facility undrawn, the day-one cost of debt would be 3.37% based on three-month LIBOR of 0.53%.

If floating interest rates on day-one were at the level of the interest rate cap of 2.75%, the blended rate of interest that would be payable would be 4.11%, again, assuming that the capex facility is undrawn.

The LTV covenant under the new facility is 75% and, based upon the published 31 March 2014 valuation of The Mall Fund’s properties, the initial LTV would be 51% prior to the drawdown of any of the capex facility.

Rothschild advised The Mall Fund and Aviva, its fund manager on the refinancing, which has completed the turnaround for the once largest UK shopping centre fund.

Back in early 2008, The Mall Fund was at its peak, valued at £3bn with £1.6bn in secured debt comprised of the CMBS loan and junior loan.

The Mall Fund sold several shopping centres as part of an agreement with bondholders in July 2010 to reduce its outstanding debt2010 in exchange for an extension to the CMBS loan out to summer 2015. Sales included:

  • the sale of The Castle Mall Shopping Centre in Norwich to Infrared European Active Real Estate Fund in July 2012 for £77.3m.
  • the Cleveland Centre Middlesbrough for £82m and the Alhambra Centre in Barnsley for £26m, both to F&C REIT in September 2011; and
  • the sale of The Galleries shopping centre in Bristol for £50.2m to HSBC European Active Real Estate Trust in January 2011;

Hugh Scott-Barrett, chief executive of Capital & Regional, said in a statement: “This refinancing has been achieved at a very attractive all-in cost against the current initial yield of 6.7% produced by The Mall Fund’s assets.

“It has allowed us to establish a strong platform for growth by creating the flexibility for The Mall Fund to continue its programme of capital investment in order to create long term value, at a time when sentiment is improving in both the investment and tenant markets.”

About CoStar News

Finance Editor, CoStar News
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