Lauren Parr reports on the challenges of restructuring Guy Hands’ German multifamily monolith
One sector of the European property market that is under huge pressure because of the severe shortage of bank debt for real estate is German multifamily housing. Next year, €10bn of loans in CMBS deals in this sector fall due, meaning the deals must be refinanced or restructured or they will crash into default.
The largest of them all, and the biggest ever European CMBS deal, is GRAND, the €5.8bn securitisation put in place in 2006 by Deutsche Annington. The property company, controlled by Guy Hands’ Terra Firm, faces the challenge of refinancing or restructuring the €4.7bn balance by loan maturity in July 2013.
While this is not a firefighting scenario – it is an in-the-money, performing deal which investors like – its complex structure means the timetable launched nine months ago for the workout has slipped back and the participants are edgy. Investors are nervous, after the ad hoc negotiating committee formed by the borrower initially tried to exclude the loan servicer from the process, which is being advised by Brookland Partners and Paul Hastings.
The committee comprises five noteholders representing about 25% of all the notes: BayernLB, ING Investment Management, LBBW, PIMCO and Pru-M&G. Deutsche Annington then agreed to open up the financial details of its restructuring proposal to Capita Asset Services. One participant commented that the trustee included its legal advisers in all communication with other transaction counterparties. It is believed that this may be due to concerns over being sued for a defect in the transaction documentation.
Voting procedure is vague
The bad drafting relates to voting at extraordinary general meetings: the quorum for EGM is specified but the threshold for passing a resolution is missing – a flaw that put a block on the workout for a while. “The fact the documentation doesn’t actually give a voting threshold has meant the borrower needed to look at some way of figuring out how best to come to a consensus,” says one noteholder. They have come up with an innovative proposed solution: a scheme of arrangement, which is a legal process that allows the majority of creditors to change the terms of their debt.
However, says one participant: “The bigger issue is how the scheme of arrangement will work: 75% of all the bonds need to vote in aggregate. Junior noteholders are worried the borrower will try to push forward in favour of senior noteholders.”
One noteholder willing to be restricted, but who was not selected by the borrower and its advisers Blackstone and Allen & Overy to form part of the ad hoc committee, adds: “Very little has materialised so far in terms of a final proposal coming out for all noteholders to vote on. I hope the borrower and its advisers come to noteholders with a proposal soon, and give us more than the standard two or three weeks to get through an extraordinary resolution to make a decision. But they may just try to say: ‘We’ve worked with an ad hoc committee and they’ve approved it therefore you should get comfortable.’”
In fact movement is expected very soon. Originally pencilled in for October 2011, the borrower intends to formalise an “amend and extend” proposal to try and tackle the sheer amount of debt that needs to be refinanced even with a potential equity injection to reduce the loan-to-value ratio.The original €5.8bn CMBS comprised 31 underlying loans, arranged by Barclays Capital and Citigroup in 2006, and secured against more than 180,000 multifamily housing units across Germany valued at €8.7bn. There was a further €1.5bn of supersenior debt secured on the portfolio (see fact box below).
With the other €5bn or so of German multifamily loans also due to mature next year, Deutsche Annington is in competition for a limited amount of bank debt or any other possible sources of finance.
Extension to 2018
The borrower’s plan will be to try to negotiate a staggered refinancing in five annual instalments of €500m, starting this year, which will require noteholders to agree to a restructuring to extend the underlying debt to July 2018. This would reduce the outstanding balance to €2.2bn by the end of 2016 – a slower pace than either the borrower or noteholders had hoped for, but reflective of the continued lack of availability of bank finance.
The capital will flow through the class A to class F noteholders on a pro rata basis, after which assets will be released. To create an incentive for noteholders and lenders, the borrower will very likely have to inject equity into the deal – how much isn’t yet clear, because no new valuation has been made public since 2006.
Since the delay in October – when the hope was that the plan would be implemented during the first quarter of 2012 – the borrower has been locked in discussions with the ad hoc committee about the commercial terms of its proposal. In particular, Rothschild has developed a model that shows how the debt apportioned to each secured property will work going forward and how collateral will be extracted following each partial refinance.
With bond maturity three years after loan maturity, a restructuring is also expected to include an extension of the bonds by three to five years, an innovation adopted for the first time in 2010 when the Fleet Street Finance 2 CMBS was restructured (see March 2010, pp12-13), which avoided a downgrade of the notes’ ratings. Also likely are increased amortisation and further property sales before extended loan maturity. “Guy Hands has huge equity in the deal, so there is a strong inclination by the borrower to push something through,” says a participant.
Partial refinance achieved at Immeo 2
There are another four large German multifamily securitisations making up most of the debt spike next year: GRF and Woba, where US private equity group Fortress is the sponsor; French REIT Foncière des Régions’ (FdR) €1.4bn Immeo 2; and BGP’s Quokka Finance.
Like Deutsche Annington, FdR’s subsidiary Foncière Développement Logements (FDL), which owns Immeo Wohnen – borrower to the Immeo Residential Finance No 2 CMBS – is pursuing a staggered refinancing for its €1.4bn of securitised debt.
AgFe had been mandated to advise well ahead of the December 2013 maturity. Following a €207.5m partial refinancing through BayernLB and Berlin Hyp in December 2010, FDL refinanced a further €387m last month with LBBW and Landesbank Berlin.
It secured a new 9.5-year facility at an average rate of 4%, backed by nearly 10,000 residential properties. Including proceeds of €120.3m realised from asset disposals by FDL since the start of 2011, the refinancing has prepaid around 40% of the remaining securitisation on a pro rata basis. FDL now has €537m of securitised debt left to refinance from mid-2012.
The borrower’s proposal to extend the underlying seven-year loan by 18 months to June 2015 is on hold, however. Noteholders are thought to have dismissed the proposal at the start of 2011 partly because they felt the deal was still some way away from maturity. “When you go to investors ahead of there being a crunch point, you obviously get a benefit of addressing an issue you’re concerned about early but it’s not at the forefront of people’s minds. Investors try to deal with more pressing things first and then work down their list,” says an adviser.
Neither were the terms on offer sufficiently attractive. The borrower had also requested a reduction in the scheduled amortisation to reflect the reduction in portfolio size. Only the Class A noteholders would have received compensation in this scenario – a consent fee of 0.25% and an extension fee ranging from 0.75% to 2%, subject to how much debt remained outstanding and the timing of refinancings achieved.
One outsider to the deal sees this as its downfall: “In trying to push through an amendment with just the class As, AgFe misjudged the mindset of the noteholders.” The source adds: “Given how much [the borrower] has refinanced and how little it has left it may not be necessary to re-approach noteholders.”