Mount Kellett’s CityPoint junior loan sale at just above £70m cements Brookfield’s pole position for skyscraper buy

Brookfield Office Properties purchased the junior loan secured by CityPoint tower in the City of London for just over £70m, CoStar News understands, positioning the global real estate investor with a strategic advantage over rivals to purchase the skyscraper.

CoStar News understands that Brookfield’s purchase of the junior loan, which has a nominal balance of £106m plus around £8m in accrued unpaid interest, was for between £70m and £75m, reflecting a discount on the nominal balance of around 34%. 

Interest payments were suspended on the junior loan, and the underlying securitisation – Ulysses ELoC 27 – in February 2012 and three months later Mount Kellett rejected a consensual restructuring of the debt.

The difference between Brookfield’s price paid for the junior loan – estimated at circa £70m to £75m – and the total liabilities of debt inclusive of unpaid liabilities loan – estimated at £114m – reflects Brookfield’s advantage over competitor bidders in securing the direct ownership of CityPoint tower.

A rival bidder for the direct purchase of the skyscraper would need to acquire the junior loan at par and repay unpaid accrued interest on the debt, which would amount to between £39m and £44m, based on the above numbers, cementing Brookfield’s in pole position.

This strategy is similar to Kennedy Wilson’s which acquired the £119m nominal B-Loan under the Fordgate Commercial CMBS, secured by the 21-strong Jupiter portfolio, from Natixis for around £37m.

Mount Kellett acquired the junior loan– originally in two tranches of £33m and £73m – in around the summer of 2011 for a figure thought to be less than £20m, CoStar News understands, which implies an equity multiple for Mount Kellett of between 3.5 to 4 times in just over three and a half years.

The trade, last Thursday, vindicates Mount Kellett’s decision to reject a consensual restructuring in May 2012, at which point value – after super senior liabilities – was considered to have broken in the ELoC 27’s class Cs.

In the subsequent two and a half years since Mount Kellett rejected the restructuring, Citypoint’s expected sale price has risen by as much as £100m to circa £575m.

Brookfield’s principal options to complete the acquisition of CityPoint are three-fold.

Firstly, to burn off the interest rate swap mark-to-market – currently at £60m – over the next six to 18 months, which would see swap breakage fall to anywhere between £50m and just under £30m, according to estimates in a Deutsche Bank Research note.

Secondly, if Brookfield prefers to accelerate the purchase of the skyscraper, the global property investor could novate the swap, prepay the £429m Ulysses ELoC 27 note at par and buy CityPoint through pre-pack administration.

Novating the swap involves changing the borrower swap counterparty while retaining the existing swap contract, effectively staggering breaking costs over the remaining term of the swap contract upon change of ownership of the property.

Thirdly, Brookfield could adopt a combination of both strategies wherein the investor waits to burn off some of the swap and novate thereafter.

A recent comparable for CMBS swap novation is the 15 Westferry Circus sale to Canary Wharf Group (CWG) for £129.5m in July 2013.  

Met Life, the junior lender below the Radamantis ELoC No. 24 securitisation which co-incidentally another Morgan Stanley-issued transaction, novated the swap and refinanced CWG’s acquisition high leverage whole loan to protect its economic interest in the out-of-the-money B Loan and preventing crystallising steep swap breakage costs.

Under the rights of the CityPoint junior loan tranches, Brookfield is entitled to repay the Ulysses ELoC 27 notes at par. 

In addition, Brookfield would have to repay:

  • the drawn Beacon capex facility (£7.4m);
  • the servicer advance (£30m-£37m) – which is a US-style liquidity facility;
  • swap breakage costs (£50m to £30m);
  • the accrued unpaid interests on the class Cs, Ds and Es (£2.2m-£2.8m), for which interest payments were suspended in February 2012, and; 
  • assets sales costs including to receiver KPMG and special servicer Mount Street (£11.5m, based on 2% assumed).

Based on the above, with estimates in brackets taken or implied from a Deutsche Bank Research note, super senior prepayments range are £101.1m or £88.7m for breaking the swap in six months and 18 months, respectively.

This would provide net proceeds of £473.9m or £486.3m, respectively, leaving a shortfall to cover aggregate £114m junior liabilities of £69.1m or £56.7m, respectively.

Alternatively to make the junior loan whole, including repaying assumed accrued unpaid interest, based on the above assumptions, a rival bidder would have to pay closer to £650m for CityPoint tower.

Following the eventual closure of CityPoint purchase, the major opportunity to enhance value is in the eventual lease re-negotiation or replacement of anchor tenant, Simmons & Simmons.

The City law firm occupies 283,394 sq ft of the 708,035 skyscraper, which reflects £11.1m of CityPoint tower’s £27.8m annual rent roll.  The lease does not expire until 25 March 2020.

Mount Kellett did not return calls for comment while Brookfield and all other parties involved declined to comment.

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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