Bank club finances 10 Upper Bank St as CWG’s early bond prepayment triggers £170m ‘lost interest’ claim

Barclays, Lloyds Bank and HSBC jointly provided a circa £440m five-year senior loan to finance the China Life-led consortium’s acquisition of 10 Upper Bank Street in Canary Wharf last Friday.

CWG logoCanary Wharf Group (CWG), which developed the 32-storey tower in 2003, sold a 70% stake in 10 Upper Bank Street to China Life, the country’s largest insurance group with a balance sheet of more than £95bn, and a further 20% to Qatar Holding, the global investment house founded eight years ago by the Qatar Investment Authority (QIA).

CWG, through two wholly-owned entities, retained a 10% stake, in a deal which values the asset at £795m, reflecting just under a 2% premium to the tower’s £780m valuation as at the end of December 2013.

Clifford Chance is the sole office tenant in 10 Upper Bank Street on a 14-year unexpired lease term, with the retail unit let to HCA International Limited, the world’s largest private hospital group. The annual rent on the building is £44.35m.

The China Life-led consortium’s acquisition was financed by an approximately £440m five-year senior loan evenly split between Barclays, Lloyds and HSBC.

CoStar News understands that the senior loan, which reflected around a 55% LTV, was priced at around 160 basis points over three-month LIBOR, in a financing mandate self-arranged by CWG. The loan funded on Friday.

In a prepared statement, Brendan Jarvis, head of real estate EMEA, at Barclays, said: “The financing of this prestigious building required significant capital commitment and swift execution by the lender group. We are committed to supporting long-standing clients such as Canary Wharf Group plc and using our international reach to encourage major global institutions to invest in the UK.”

HSBC and Lloyds declined to comment.

CWG in delicate balance between shareholders and debt investors

Canary Wharf Group’s (CWG) divestment of 10 Upper Bank Street last Friday to a China Life-led consortium has triggered an 11% fall in the price of long-dated bonds securing CWG’s property portfolio on fears debt investors will be repaid below market price.

Bonds in the outstanding £954.29m A1 class of Canary Wharf Finance II plc, the long-dated securitisation which is secured by seven commercial properties in Canary Wharf, were trading at 122 pence in the pound the day prior to CWG’s announced sale and acquisition. 

This 22% premium to par value reflects the extent to which the coupons on the A1 bonds, at a fixed quarterly rate of 6.455% until October 2033, are above current interest rates, effectively locking in guaranteed cash streams at a very low risk-free rate.

By yesterday, bond pricing had fallen to 110 pence in the pound – or an 11% fall – on the news of the £577.9m early pre-payment of the class A1 notes, following CWG’s 90% divestment of 10 Upper Bank Street to China Life and a 20% to Qatar Holding, the global investment house of Qatar Investment Authority.

The 2001-issued securitisation, Canary Wharf Finance II plc, contains a “Spens clause” to compensate bondholders for the loss of future interest accrual, which has been calculated at £168.74m.

Whether bondholders are entitled to this additional compensation will be decided by a Court ruling after the trustee of the securitisation, Deutsche Trustee Company Limited, admitted that the transaction’s documentation was unclear. 

The ambiguity is over whether CWG, which does have some discretion over whether it redeems noteholders on early prepayment at par or at a “spens” level including compensation for loss of future interest accrual, does so specifically in the case of this asset release and prepayment.

CWG has agreed to place on deposit with Deutsche Bank’s London Branch, as escrow agent, £168.74m, until a court order clarifies or a compromise is reached.

Compromise is thought the most probable outcome as CWG seeks to balance its fiduciary duties to its shareholders, including Songbird Estates and Brookfield, and its long-term debt investors, which in respect of the Canary Wharf Finance II plc securitisation includes a raft of pension funds and insurance companies.

Shareholders will be keen to see the return of as much of the £168.74m as possible, while CWG’s debt investors, which future financing support is likely to be drawn from, will hold conflicting expectations of a “spens” level compensation.

An Ad-hoc group of the A1 noteholders is thought likely to assemble to reflect their interests through a united voice to broker compromise negotiations and, if required, make representation to the Court and the appointed Judge to preside over the requested legal ruling.

The implications of the ruling, if no prior compromise is reached, could be significant for the remaining securitisation and potentially set a precedent on future asset disposals.

Six Canary Wharf offices remain as collateral of Canary Wharf Finance II plc, comprising:

  • One Canada Square, whose tenants include Bank of New York Mellon, Mirror Group Newspapers, Moody’s Investors Services and State Street, is valued at £660m;  
  • 20 Bank Street, let to Morgan Stanley and is valued at £475m;
  • 25-33 Canada Square, let to Citigroup and is valued at £405m;
  • 40 Bank Street, let to six major tenants including Allen & Overy and Shell International, is valued at £390m;
  • 10 Cabot Square, is let to Barclays Bank, and is valued at £450m;
  • 10 South Colonade, also let to Barclays Bank, and is valued at £392.0m.

Canary Wharf Group declined to comment.

About CoStar News

Finance Editor, CoStar News
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