Toughest work-outs yield the highest rewards for advisers

Total fees paid to unwind complex CMBS deals can be massive, but advisers’ rewards vary greatly

Restructuring can be a lucrative line of work, but as with most aspects of today’s market, there’s no such thing as ‘easy money’. The level of fees on the table will partly depend on the skills attached to the restructuring firm in question, as well as the scale of the job itself.

Peter Hansell, head of property at debt adviser Cairn Capital, says: “Fees vary from transaction to transaction; there is no standard basis.” That said, fees paid for stabilising or unwinding complex CMBS deals often include both a monthly retainer and a success fee. “However, the figures can vary enormously,” Hansell adds.

One source says that it would not be unusual for an adviser to earn £100,000 per month as a monthly retainer, in some cases set off by a success fee. For example, an adviser might agree a success fee of £1m, but if the firm received monthly fees of £600,000 during the course of the restructuring it would pocket £400,000 upon completion.

“The advisers coming in for these transactions are often looking for significant fees,” says Conor Downey, a finance partner at law firm Paul Hastings.

“The difficulty is that a successful restructuring tends to be quite hard to define. A lot of advisers would probably start off by saying ‘success constitutes anything other than insolvent liquidation’, when that’s not exactly what bond holders are looking for. The market is in flux at the moment. A lot of development needs to take place before people reach an accepted position about what is normal.”

According to a source, the head of one company that advised on a restructuring deal got paid about £5m for their work on that transaction, which amounted to advising the borrower on putting together a proposal and working through it with the bond holders.

Fleet Street notoriety

Arguably the most notorious CMBS restructuring in terms of fees racked up is last year’s first-round restructuring of the Fleet Street Finance 2 deal. Estimates of the value of total fees paid to the raft of advisers on this deal vary from £30m to an astonishing £70m.

However, as Downey points out: This is not a typical example, because there were so many different advisers on the transaction, including advisers to the borrowers, advisers to the bond holders, advisers to the special servicer – the list goes on and on. I don’t think in a normal process there would be quite so many parties involved, but it’s not a cheap process, regardless.”

“You’ve got to bear in mind that when  it comes to restructuring, there’s a very divided menu,” notes another source. “Some parties are paid to liaise with one specific bond holder, where obviously fees are significantly less, so it does need to be broken down. For example, is the advice just responding to a proposal that someone else has prepared?”

In terms of who pays, if the deal is solvent and the borrower is staying in, the borrower will be likely to agree to pay for all the fees however much they end up being. However, if the deal is insolvent and the note holders are trying to minimise losses and maximise their proceeds, the investors will end up paying the fees in some shape or form.

Another source says: “The beneficiaries of those fees are either the advisers, such  as the Cairn Capitals of this world, or the servicers.” With regard to paying fees, “servicers are pretty careful about this”, he adds. “We’ve seen them negotiate pretty hard, because the money is coming out of bond holders’ pockets. They can usually do a good deal on it if they have a free hand.”

Boutiques have the edge

The advantage remains with boutique advisers rather than the  big four accounting firms, because the boutiques are more nimble about how they arrange their fees, rather than being under internal pressure to make returns. Meanwhile, the debate over the extent to which servicers’ agenda is fee-driven has been raging since values collapsed and deals got into trouble.

Ryan Prince, chief executive of debt asset manager RealStar International, says: “There’s this huge discussion about the fact that if you’re the primary servicer, the fees are a relatively low amount of money and if you’re in special servicing the fee goes up tenfold or more. Therefore incentives may distort the picture and there may be a misalignment of interest for fees to switch from primary to special servicing.”

RealStar is the asset manager and one of three borrowers in the £535m Tahiti CMBS, which was extended in June last year. “The partial answer, at least in the deal we were working on, is that our loan was never formally non-performing so we stayed in primary servicing,” says Prince. “But because of the increased time and attention  the servicer had to provide, we paid them, in essence, a success fee. This was a significant amount of money, but you want to make sure you have their time and attention to get the deal done.”