Credit rating agency DBRS Morningstar is cautioning investors to pay attention to the long-term outlook for London’s Citypoint office tower despite the sponsor Brookfield Asset Management having recently secured an extension of the loan.
In a note issued on the 29 December, the agency placed all classes of a £367.5 million (€425 million) commercial mortgage-backed securitisation under review with negative implications, meaning it considers it a high probability the company will downgrade its current ratings for the Salus (European Loan Conduit No 33) DAC.
The floating-rate senior commercial real estate facility is secured by a single asset, Citypoint office building – a 35-storey tower in the City of London owned and operated by Toronto-based Brookfield.
Brookfield securitised the debt against the tower in 2018, refinancing a senior loan which facilitated the company’s acquisition of the asset, for £561 million, in 2016.
When the debt was securitised, JLL valued the building at £600 million, representing a 61.3 percent loan-to-value ratio. But the tower was revalued at £670 million in March from a previous value of £740 million in 2021, according to stock exchange filings. However, the value of Citypoint is likely to fall further in value in the months ahead as sellers cut prices to tempt buyers back to the market.
In December, research company MSCI said there is a 25 percent gap in the values would-be investors and sellers are currently applying to properties in the UK capital. MSCI also said a “double dip in [office] property performance” could not be ruled out because of higher-for-longer rates, weakening global economic growth and waning occupier demand.
DBRS’s warning follows a filing on the Irish Stock Exchange, on 20 December, that the borrower and loan servicer Mount Street had reached an agreement to extend the loan maturity date from 20 January 2024 for one year.
The agency wrote: “DBRS Morningstar understands the final maturity date of the notes remains unchanged at 23 January 2029, thus reducing the tail period between the loan maturity and the final note maturity to four years from five years. A shorter tail period may not be sufficient time to work out the loan, if necessary, and repay the bondholders. As a result, DBRS Morningstar is placing its credit ratings on the notes Under Review with Negative Implications.”
The senior loan, which is not in default, is split between two facilities: one totalling £354.0 million and a capex facility of £13.5 million. Additionally, there is also a non-securitised mezzanine facility of £91.9 million, which is subordinated to the senior facilities.
Benjamin Bouchet, director, structured finance at Scope Ratings, said Brookfield is likely to have sought an extension because a straightforward refinancing would likely be hampered by the mezzanine loan. That mezzanine financing takes the LTV against the current building value to around 70 percent.
Brookfield did not respond to requests for comment.
The loan was initially scheduled to mature on 20 January 2022 with two one-year conditional extension options available to the borrower, which were exercised, extending the senior loan’s maturity to 22 January 2024. But in September, Brookfield entered talks with Mount Street to find a strategy to extend the loan further.
The facility is in cash trap with respect to its debt yield, which was reported at 7.9 percent as of October 2023, below the cash trap covenant of 8.0 percent, according to DBRS.
The senior loan, which is interest-only, currently accrues interest at the aggregate of compounded Sonia and a credit adjustment spread of 0.1193 percent, plus a margin of 2.15 percent per annum, which will increase to 2.50 percent in January 2024. A current hedging instrument, with a strike rate of 2.5 percent, expires on 20 January 2024 but as part of the extension conditions, the senior borrower has to purchase new hedging at the same strike rate until January 2025.
Also in exchange for the extension, Brookfield has agreed to increase the senior loan margin by 0.35 percent to 2.50 percent per annum for the extension period and a one-off maturity fee of 0.25 percent of the principal amount outstanding of the senior loan.
Citypoint, which totals 709,236 square feet of lettable area, is currently 17.6 percent vacant, with three of four recently refurbished floors without a tenant. It is understood an incumbent tenant is also due to vacate the building in the coming weeks.
Between 2020 and 2021, Brookfield undertook an extensive refurbishment to provide high-quality office space alongside landscaped terraces. CBRE is currently marketing floors five, six and seven at a rent of £63.50 per square foot.
Bouchet said: “The concessions have been extensive and the terms are credit positive for the senior lenders. Although the hedge must have been expensive for Brookfield, the margin on the loan is still better than what the sponsor might get otherwise given where the current interest rates are. I think Brookfield is hoping that in the next quarters, they manage to close a few of the potential new tenants and decrease the vacancy rate below 10 percent.”
“The building itself is not necessarily in a bad place. It’s just the office sector is not in a good place.”