The DKr6.8 billion (€912 million) refinancing package issued to private equity investor Blackstone’s Danish residential-focused subsidiary this month, was one of the largest debt deals in Europe of 2023. It was also an example of the US mega-manager replacing finance designed to enable the growth of its platform with debt from local lenders now that it has been stabilised.
Blackstone’s refinancing package replaced an existing bank loan issued by German lender Deutsche Bank, which was due to expire at the end of this year.
This original loan, issued in 2019, funded Blackstone’s acquisition of Kereby – a Copenhagen-based company, then called 360 North. At the time, the facility was in the region of €200 million. Deutsche Bank underwrote the loan and syndicated it to institutional investors including insurers AIG and AXA. As the Kereby platform grew, expanding to comprise 2,300 homes in Copenhagen, so did the financing facility, to around €900 million.
The two Danish institutions involved, understood to be among Denmark’s largest domestic banks, provided the senior mortgage debt, while the subordinated debt capital was issued by Sydney-headquartered financial services group Macquarie Capital and Viga Real Estate Management, a residential property company based in Copenhagen. It is understood this is the first time Macquarie Capital has underwritten a real estate loan in Denmark.
Gadi Jay, senior managing director for real estate, at Blackstone told Real Estate Capital Europe the business’s decision to refinance with Danish lenders was deliberate and a while in the planning.
“We have been developing relationships with the regional banks for a long time,” he said. “It was more efficient to do the whole loan financing with an international bank when we originally started building the platform, and then refinance with local banks after showing our management team’s track record and the quality of the portfolio. We try to use our international scale to build local businesses. We’ve done it elsewhere. We have strong relationships with Spanish banks within Spain, German banks in Germany.
“Kereby has developed strong local relationships, which is testament to the strength of the business and its Copenhagen-based management team. As we came to refinance the business, domestic lenders were keen to support its further growth. The original loan was akin to a whole loan but given the capital improvements made to the properties since, we were able to refinance it into two individual senior facilities, each with local lenders, and a top-up loan from Viga, a local firm, and Macquarie, [which] provided the majority of the subordinated capital.”
The debt facilities, all of five years in duration, provided capital at a loan-to-value ratio of 60 percent, while Blackstone provided equity for the remaining portion. The senior debt was provided at 50 percent. It is understood the senior loans were priced at less than 100 basis points over the base rate, which was in the region of 3.5 percent, and the subordinate debt was priced in the region of 6 percent over the base rate.
Cheaper cost of capital
Securing senior debt from the Danish lenders was, as Jay explained, a “competitive cost of capital” because the institutions involved fund their issuances via the Danish covered bond market, which is strictly regulated, with rules governing LTV limits.
Unlike with corporate bonds, noteholders are protected by dual recourse to both the capital of the issuing bank or institution and to the assets. This means they offer an investment with a risk profile similar to a Danish government bond. Consequently, this allows for a cheap form of capital for borrowers.
“[Covered bonds are] a source of liquidity for the Danish banks. They take these loans and package them as covered bonds, with recourse to their own balance sheets, and sell them into that market. Given the combination of the quality of the collateral, and the additional recourse provided by the bank, this source of financing has a competitive cost of capital.”
But lower LTV limits for mortgage bond products has opened up opportunities for other debt providers to issue debt alongside Danish banks, said Gustav Bjørn, managing director, debt advisory, at Catella Corporate Finance Denmark, which advised Macquarie and Viga.
He said borrowers in Denmark are increasingly seeking subordinated capital in addition to senior debt. “The demand for subordinated debt has never been present in the Danish market. Mortgage bonds have been, and remain, a highly liquid market but stricter regulations around capital requirements, interest-coverage ratio requirements and loan-to-value limits mean a sizeable funding gap has now emerged.”
Bjørn added: “Blackstone’s deal sends a powerful message to the market that complex transactions can be done as borrowers approach loan maturities.”
Despite Blackstone being sponsor in some of the largest debt deals in 2023, Jay said the deal had not been quick to arrange. “These things take time, it’s been a journey to build relationships with the regional lenders, but it ultimately probably took nine months or so to get the financing done. We always try to start refinancings with sufficient time in advance of the maturities.
“We operate in a more challenging environment today. But we had confidence in the strength of this platform, first in the strength of the relationships Kereby had developed, and in the performance and quality of our overall business. We also knew we had the trust and confidence of our existing lenders to support us in case required.”
In the days since the manager announced the mega-refinancing, it was reported, by trade publication PropertyEU, that Blackstone was close to securing a refinancing of €1.5 billion for its Spanish residential arm, Testa. It is another residential property business, although in this case the lender mix – which includes Banco Santander, Société Générale and Bank of America – is cross-border. The two major refinancings in quick succession suggest Blackstone will be one of the most significant borrowers in European markets this year.
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