Tim Knowles, the property investor and borrower behind the Lea Valley securitised loan, has been successful in acquiring the distressed 24-strong portfolio through his First Investments Limited firm in an £88m discounted purchase offer (DPO) through Solutus Advisors, the special servicing firm he indirectly founded.
Knowles’ £88m DPO – after £2m in costs associated with executing the transaction –reflects a 58.2% discount on the £210.7m unpaid balance of the Lea Valley loan, which forms part of the DECO 8 ‐ UK Conduit 2 p.l.c CMBS.
There were no additional underbidders for the Lea Valley loan. Knowles has selected two lenders to finance the acquisition but declined to reveal the mix and quantum of debt at this stage.
In addition, the £88m purchase price also reflects a 1.5% discount on the latest valuation of portfolio of £89.4m, as reported by Situs in the January quarterly investor report.
The proceeds of the DPO will be used to pay certain fees and expenses and then repay the principal of the Lea Valley Loan to DECO 8. Recovery estimates for noteholders in the DECO 8 CMBS vary – and are subject to the future recoveries in the conduit CMBS remaining eight loans.
The three largest are the Lea Valley loan; the Mapeley II loan; and Vincent Tchenguiz’s Fairhold Portfolio loan.
In mid-April, a Solutus Advisors-commissioned Cushman & Wakefield to re-value the Mapeley II loan – dubbed the Beta portfolio and which includes Reading’s Microsoft Campus. The Cushman valuation surprised on the upside with a 42.5% valuation increase to £191.4m, rising to £200m for an additional “premium for portfolio”.
The Fairhold Portfolio – a portfolio of ground rents owned by Tchenguiz – has an unpaid whole loan balance of £85.5m including a £19.7m B-Loan, although there is a long-dated swap which ranks super senior. The balances of DECO 8’s five CMBS loans are all much smaller, with the largest loan only £15.1m.
Estimates of the recoveries to noteholders, therefore, ranges between value breaking high in the class Bs on a conservative scenario to low in the class Cs on a more optimistic scenario.
First Investments now has to pay Solutus a non-refundable deposit and must complete the transaction within a three month period, which may be extended by upon the payment of another non-refundable deposit.
If either deposit is forfeited, it will be used to repay the Lea Valley Loan, thus providing First Investments with an incentive to complete the transaction within the contemplated time periods.
Solutus wrote in a statement to the Stock Exchange that opinions of two national property investment agents were sought to determine the price at which the sale could realistically be achieved – although these levels are not disclosed, Solutus stated that these opinions have both indicated a price consistent with that contemplated in the DPO offer.
The Solutus notice added the “absence of available cash flow to fund capital expenditure has led the special servicer to conclude that it is not practically possible or prudent to adopt a strategy of attempting to enhance the value of the portfolio through active asset management over time”.
The statement added: “Consequently, selling the portfolio, either as a whole or on an individual asset of sub-portfolio basis, represents the only practical resolution strategy for the loan. Further, the special servicer has determined, in conjunction with its real estate advisors, that a sale should be undertaken as quickly as possible, as delay will, in all likelihood, result in the value of the portfolio deteriorating further.”
Tim Knowles, First Investments’ managing director said in a statement: “This process has been conducted in a transparent and public manner and we have made information about both the portfolio and our offer available to the world at large. The level of support that we achieved from Noteholders is testimony to the economic rationale behind our offer but also, we believe, the transparency of the process that we have engaged in.”
This statement contrasts with the concerns of Fitch Ratings back on 14 December 2012 when Fitch withdrew its Solutus Advisors’s servicer rating citing that “Solutus Advisors provided incorrect and misleading information during the initial servicer rating”.
The Fitch ratings notice at the time continued: “Links between Solutus Advisors and the Lea Valley borrower have recently been revealed to Fitch, and Fitch believes this could undermine the desired level of independence of special servicing should the loan eventually default (as expected by Fitch).”
Knowles stated that several lawyers worked on his proposal from the property and potential conflict of interest angle with supportive noteholders understanding the need for this vigorous approach.
Knowles’ statement added: “The Lea Valley Loan was made at the peak of the market in 2006. Over the intervening years, the assets have deteriorated significantly and are on a downward trajectory, with vacancies increasing, unrecoverable costs increasing and rental income declining. This has, quite naturally, had an impact on the ability to repay the Lea Valley Loan and led us to seek a consensual resolution of the situation which would prevent the further destruction of the remaining value.
“We recognised that our real creditors were the noteholders in DECO 8, not the issuing vehicle or the entities that act for it, and so we engaged in a process designed to accommodate their views.
James Bannister, managing director of Solutus, in a separate statement added: “First Investments made its original DPO offer in an open letter addressed to Situs Asset Management Limited in November 2014.
“It then revised the offer on the basis of feedback it received from a group of noteholders. Having received the revised offer, we have, in accordance with our duty to maximise recoveries in respect of the Lea Valley loan, assessed its terms and the real estate assets themselves.
“In doing so, we have also taken advice from third party professionals as to the price achievable on a disposal of the assets and considered whether the assets generate sufficient cash flow to fund the basics i.e. debt interest/running costs and management costs and have also considered whether defensive and value accretive capital expenditure could be funded.
“We have followed a process that we would have followed for a loan in respect of which we were appointed special servicer.
“Given the deteriorating nature of the assets, the inability to support debt interest/running costs and management costs in the future given the size of the debt and the absence of cash flow that we could use to invest in the assets to fund defensive and value accretive capital expenditure, we have concluded that the offer represents the best resolution that is practically achievable, with other possible strategies involving additional costs and execution uncertainty.
“We also canvassed the views of noteholders ourselves and, based on the feedback provided to us, established that there is indeed a very high level of support for accepting the offer made by First Investments.”