A group of Qatari investors, believed to be ultimately Gulf Finance House and Financiere Centuria, have issued litigation proceedings against Hatfield Philips International (HPI) over the sale of the Margaux German multi-family property portfolio to IN-WEST Partners for €268m in December 2013.
In an RNS announcement on Monday, HPI confirmed that the ultimate shareholders behind the Margaux borrower – which was the collateral in a Credit Suisse-issued securitisation – claim that the portfolio was “sold on unfavourable terms and that a higher purchase price could have been achieved for such sale”.
HPI replied in the notice: “The special servicer refutes these allegations entirely and intends to defend the claims vigorously.”
Beyond this public statement, HPI declined to comment.
The legal challenge will be heard in Luxembourg later this year, although no court date is set.
While the amount that the former Margaux portfolio owners are seeking in damages is not yet public, it is expected to reflect the difference between the sale price achieved and the sale price the Qatari investors believe could have been realised.
For the litigation exercise to be economically viable, this is likely to be at least a 3% premium to the €268m price achieved, which would imply a damage claim of €8m. If the premium was 5% or 10%, this would equate to €13.4m or €26.8m, respectively.
The litigation action is a turnaround in approach by at least one of the two sponsors, given that HPI stated at an investor update meeting in March 2012 that “the main sponsor [has] walked away from the transaction”.
The Margaux Loan – part of the Titan Europe 2006-2 CMBS – fell into default on 26 July 2012, following a non-repayment at maturity, triggering the loan’s move into special servicing.
While the Qatari borrowers may seek to argue that HPI closed the deal in December 2014, based on a sales price agreed 12 months earlier, the borrower decided against refinancing the portfolio to regain control prior to, or since, the loan matured.
In the second half of 2013, HPI instructed Savills to run a two-stage sales process to sell the direct property portfolio secured by the Margaux Loan.
The portfolio consists of more than 8,000 units and is predominantly located in the former East Germany, with concentrations in Berlin, Leipzig, Chemnitz, Halle-Neustadt, Gotha, Dusseldorf and Crossen.
The last published valuation for the Margaux portfolio was €267.2m, dated 30 June 2012, which indicated that there was a capex requirement of €15.9m, compared to €6.8m in actual capex spent.
On 23 December 2013, IN-WEST Partners emerged as the winning bidding paying €268.0m, against an outstanding loan balance as at the previous interest payment date (IPD) of €264.4m.
IN-WEST Partners paid a €25m deposit, which financed a capital expenditure programme to improve the portfolio’s value, but the property portfolio remained within the CMBS loan structure throughout last year.
The deal finally closed on New Year’s Eve 2014, with noteholders receiving proceeds of €239.5m at the January 2015 IPD, which reflects a 9.4% loss of the outstanding balance at the time after fees, costs and expenses including tax and operational costs and liabilities.
However, there is further cash available in the transaction’s escrow account which could be distributed to noteholders pending the outcome of a number of ongoing tax issues.
In addition, delaying the closure of the deal for an entire year allowed noteholders in the CMBS to receive a further four quarterly interest payments from the rent-roll, particularly of benefit to the junior noteholders in the transaction.
The ultimate shareholders behind The Margaux Loan was impressively unmasked by Deutsche Bank’s CMBS research team dated 26 July 2012, named Hunting for value in German Multifamily CMBS.
In the research note, co-authors Paul Heaton and Conor O’Toole wrote that the Margaux and Petrus loans – which share the same sponsor – “are by far the most mysterious loans in the transaction (and arguably the entirety of European CMBS)”.
Heaton and O’Toole deciphered that Lone Star sold the 15,000-strng multi-family portfolio to two Arabic investors, believed to be Gulf Finance House and Financiere Centuria, for €594m in 2006.