A re-securitisation of the debt is not under consideration by BAML which instead is expected to sell down the bulk of the loan in the syndication market.
Colony Capital exchanged on the purchase of Gemini in mid-October, as revealed by CoStar News, after Värde Partners initial £310.5m winning bid collapsed after the firm attempted to renegotiate on price.
The purchase price by Colony reflects a sub 9% net initial yield and an 11.6% premium to GVA’s £278.6m valuation in March 2015 and a 3.6% premium to CBRE’s initial £300m asking price.
Fitch Ratings confirmed on Friday afternoon in a statement that the £311m sale would lead to a 30% recovery estimate for the class A notes in the securitisation – Gemini Eclipse 2006-3 PLC – after certain costs, swap and liquidity facility liabilities are paid.
This reflects the second boost for noteholders in the challenging deal after CBRE Loan Servicing negotiated with Barclays in 2012 to waive of full crystallisation cost of the swap on loan enforcement, in exchange for an agreed pay-down of the swap over a three-year period.
The remaining notes suffer a full loss, as has been expected for several years, in one of the poorest performing ever CMBS transactions.
Fitch stated that the recovery estimate is “slightly down from previous estimates” which is due to the “sale price being firmer than previously expected and also to a legal ruling on the allocation of sales proceeds towards principal rather than interest”.
In October 2015, the courts ruled that all rental income should be used for interest payments, and surrender premiums/sale proceeds for principal payments. Prior to this decision, collateral cash flow had been held back, with £15.5m of rent escrowed.
This should be available to meet interest expenses, including the portion of liquidity drawings that remains payable in the issuer interest waterfall, Fitch explained.
The issuer of Gemini Eclipse 2006-3 PLC issued a statement two weeks ago outlining its position on the material issues surrounding it’s over valuation litigation proceedings, filed against CBRE and Warwick Street in July 2013, the latter a former subsidiary entity controlled by King Sturge.
The issuer argues that the bracket – the range for which a valuation can be above or below the “correct valuation” and not be negligent – is not a fixed percentage and the 15% ‘bracket’ which was uncontested by all sides in the Titan vs Colliers International case has not established a consistent bracket across all cases.
The statement continued: “The bracket in one case tells you nothing about the bracket in another. The width of the bracket depends entirely on the difficulty of the particular valuation.
“Gemini’s case is that the relevant bracket is for each property. That is because the valuers here were instructed that ‘there should be no premium given for the portfolio and each property should be valued individually’.”
The issuer continued in its statement to suggest that one salient read-through from the Titan case was the difference between the purchase price and subsequent valuation for the securitisation.
The issuer highlights six separate examples from the original 37-strong portfolio which show difference between purchase price and subsequent valuation – all within six months or less – at up to 42%.
Martineau Place in Birmingham, for example was acquired by Propinvest in March 2006 for £161m and valued five months later at £228.55m. Similarly, the Paisley Shopping Centre was acquired in February 2006 for £48.175m and revalued six months later at £66.4m, reflecting a 38% hike.
The issuer continued: “Once the valuer is out of the bracket, and therefore negligent, the bracket falls away. Loss is then calculated based on the correct valuation not the highest non negligent.”
The defendants have until 25 January to respond.
Following the closure of the deal next week, the issuer has confirmed it plans to retain between £13m and £15m in cash funds to fund its legal and on-going administration fees and expenses until completion of the valuation claim against CBRE and Warwick Street.
The issuer has already incurred approximately £6.5m (excluding taxes) of expenses dating back to 2011 in connection with the valuation claim, including legal fees, expert fees and insurance premium, and has also paid £2,523,904 into court as security for costs. All figures are dated 25 October 2015.
All parties declined to comment.