Restructuring spurs German Opera revival for Eurohypo

One of the largest single-loan European property securitisations to default this cycle has been restructured. Opera Germany (No 2) is a €560m CMBS secured on four German shopping centres.

The €560m senior loan and an additional €106m of junior and mezzanine debt was provided by Eurohypo, which securitised the senior debt in 2006 and sold the mezzanine piece of the subordinated debt to investors, thought to be Cambridge Place Investment Management, Citibank and RBS. The junior loan was sold on to Deutsche Postbank and Deutsche Hyp, and Eurohypo, which is also the loan servicer, kept a slice.

Last November, the securitised loan breached its loan-to-value covenant, after Jones Lang LaSalle revalued the properties at €605m, based on the March 2009 valuation date, resulting in an LTV of 93%. Eurohypo chose not to enforce the LTV covenant and sell the properties, which JLL said would take time and potentially raise far less than the latest market value, leading to possible losses for the CMBS note holders.

Instead, the subordinated debt holders, and sponsors Merrill Lynch and ECE, agreed to cut the existing subordinated debt by €82m, through discounted debt buy-backs and debt-to-equity swaps, while also putting in new equity and subordinated debt. This will pay for a €63.5m programme to refurbish and asset manage the schemes. The loan will also be extended from October 2011 to October 2013, one year before the notes mature in October 2014.

Eurohypo says the restructuring is based on the expectation of a rise in the properties’ value in the next four years, “but even without such improvement, the properties will be stabilised by the intended capital expenditure and tenant improvement measures in connection with new leases”.

Benedikt Kiesl, Eurohypo’s managing director of European structured finance, says he believes it is the only single-loan CMBS deal of any size to have been restructured. “The heart of such a restructuring is the business plan for running the properties,” says Kiesl.

“ECE delivered a compelling plan for the high-quality portfolio; it was clear that we had to cut the debt and put fresh money in, which is always hard, as parties that lose money don’t want to put fresh money in.” The restructuring has converted €82m of the €106m of subordinated debt (A-2/B and A-2/C) into quasi equity. Owners of these tranches will receive no income until all the senior debt has been repaid. This has cut the overall quantum of debt by €82m. The remaining €24m of formerly subordinated debt (part of facility A-2/B) remains in place.

In addition, a new subordinated CapEx loan, also of €24m, has been injected (see table). Some subordinated debt holders of both A-2/B (partly) and A-2/C (completely) sold out at a big discount. New capital is also being injected by equity holders ECE, Merrill Lynch and others to whom the US bank sold on equity, as a restructuring equity contribution of around €27m.

There is another €12m of cash to replace the old interest shortfall guarantee (€6m was paid prior to the restructuring date), which, together with the €24m CapEx facility, makes around €63m to be spent on asset management under the new business plan.

With a restructuring milestone plan agreed, all LTV and interest cover covenants have been dropped until the final maturity date. Caroline Phillips, Eurohypo’s European head of structured debt products, led the servicing team that acted for note holders. She says: “We took decisions without the need to go to note holders. Restructuring was the best option for the senior loan; the business plan is sound and the alternative was foreclosure, which would have led to a material principal loss on the senior loan. “Note holders have since told us they’re glad we’re being decisive and taking action.”


Rescue plan to bail out sinking shopping centres

Two large and two smaller assets form the collateral in Opera Germany 2. The largest, Dusselfdorf’s upmarket Kö-Galerie shopping mall (pictured) and Rhein Ruhr Zentrum in Mulheim near Essen, were revalued at €239.2m and €251.8m respectively. The other schemes are Schwanenmarkt in Krefeld and Opernpassage in Cologne. Occupancy and rental income had fallen at all four schemes, but got much worse for Kö-Galerie when tenant McKinsey, which had paid 15% of the rent, left in September. In December, the servicer told investors that improvement of its performance “is crucial to the loan’s performance”.

Eurohypo said there was a big risk that without more investment, “the condition of Kö-Galerie will no longer meet consumers’ and tenants’ requirements for retail and office space”. The business plan, to be executed by retail development specialist ECE, aims to boost Kö-Galerie’s value to €314.7m by April 2012.