FIREM, which will lead the asset management, has acquired, with its backer, the Brunel shopping centre for 2% premium to its £66.5m valuation in March 2015 by Knight Frank, and approximately 28.6% discount to the loan’s £95.2m nominal unpaid balance.
However, Class A2 noteholders in the DECO 6 – UK Large Loan 2 CMBS only received £65.48m of this £68.0m, according to the cash management report for the securitisation which the Brunel Shopping Centre loan forms part of.
This leaves a gap of £2.52m in costs held by Solutus Advisors, the special servicer which is indirectly owned by Tim Knowles.
Solutus stated in an RIS notice on 21 October that the deductions from the headline £68.0m price were for “execution costs held by or to the order of the special servicer and will, in due course, be applied by the special servicer in partial repayment of the loan”.
The Jersey-listed Brunel Investments secured bond, which FIREM-led loan acquisition, is comprised of:
- tranche A: a £44.2m bond, reflecting 66% LTV, based on the six months old Knight Frank valuation, priced at 400 basis points over three-month LIBOR;
- tranche B: a £23.8m bond, also priced at 400 basis points over three-month LIBOR.
CoStar News understands that the investors in tranche A of the new capital structure include noteholders in the Class A2 of the DECO 6 – UK Large Loan 2 CMBS, which effectively refinances the Swindon shopping centre at 66%, de-risking for the noteholders which roll over at a much higher coupon.
The tranche B investor is FIREM’s backer, which is in the form of further debt as the transaction is a loan purchase of the matured CMBS loan.
Tranche B comprised the remaining 35% of the capital stack – and carries an equal 400bps margin to tranche A, despite the clear greater risk. This is perhaps explained by what Knowles said, in a statement to CoStar News, of noteholders in the refinancing participating “in the increase in value of the property going forward”.
This follows two preceding factors which comprised “refinancing the property at a small premium to its current market value [and] requiring us to contribute a mutually agreed amount of new equity to invest in the property so as to create additional value,” explained Knowles in the statement.
According to Knowles, this refinancing at a 2% premium to latest valuation, mutually agreed fresh equity and share in future created upside was a proposal by 77.45% of the Class A2 noteholders who approached FIREM.
Knowles and First Investments declined to say what level of fresh equity that is but CoStar News understands that it is around £5m in the form of a capex facility.
Tim Knowles, Managing Director of FIREM said: “To us, this was a logical commercial proposition and one that we were happy to support given that it enhanced the position of the only noteholders who, realistically, had any economic interest in the loan.
“Our decision to do so is consistent with our thinking that a structured approach to such situations can work for the benefit of those with such economic interests. We are delighted to have concluded this transaction.”
The shopping centre was formerly owned by the Brunel Unit Trust, by a graular group of investors, which was managed by The CIT Group who paid £130.15m, financed by a £110.7m whole loan from Deutsche Bank with the original junior loan cut at £6.1m, most recently owned by Nationwide Building Scoiety, CoStar News understands.
FIREM’s purchase of the loan at £68.0m is almost 25% less than the £90m vacant possession value (VPV), as valued by DTZ in March 2005 ahead of the Deutsche Bank-issued securitisation.
The Brunel shopping centre in recent years has fallen down the pecking order in Swindon, arguably as the town’s third shopping centre, given its age and general condition, after Regent Circus and The Parade.
The business plan for the shopping centre focuses on the development of the Brunel’s food court, which “will be built within a time-scale and following a process that has been agreed with noteholders”, according to a statement from FIREM.
The statement continued: “FI will be responsible for letting the food court as part of its asset management function and obtaining planning consents for the food court development to take place.
“If FI does not fulfil its development obligations, that will be an event of default under the facility documentation, allowing the noteholder to step in and take control of the situation.”
FIREM will take ongoing asset management fees from the shopping centre, as part of the deal.
Asked whether this transaction could be seen as a template for future workout of specially serviced loans, under Solutus Advisors management, with FIREM coming in as asset manager backed by noteholders and external financiers, the response was:
“FI would be happy to work with other noteholders to consider similar resolutions and has received a number of proposals where the special servicing is undertaken by someone other than Solutus.
“Any special servicer would have to undertake its own analysis and assessment of whether the proposal maximised recoveries.
“So, if the transaction is to be repeated, there would, realistically, have to be strong support from noteholders giving the proposal similar legitimacy and the relevant special servicer would have to determine that it was maximising recoveries by supporting such a course of action.”