Noteholders have a lot to digest in refinancing plan for German housing CMBS, writes Lauren Parr
The proposal to refinance the €4.3bn GRAND multi-family housing securitisation left noteholders with plenty to think about when it was finally unveiled this month.
GRAND is one of the largest refinancings attempted in Europe and most noteholders had waited almost a year for borrower Deutsche Annington to show its hand. The loans underlying the deal face bullet maturity in July 2013 and €4.3bn is a huge amount to refinance in today’s debt-starved markets.
Deutsche Annington’s draft heads of terms, to be ratified by November if there are no objections, propose to inject equity, step up the margin paid on notes and apply further, ‘hard’ amortisation to make it easier to refinance the outstanding debt in chunks, in return for a five-year loan extension.
One of several contentious issues was that the borrower and its advisers only discussed the refinancing with an ad-hoc group of class A noteholders, who were allowed to keep trading during the near year-long discussions, except in the two weeks before the announcement (see panel).
In the days since the announcement Cairn Capital has been appointed to advise the issuer, while loan servicer Capita Asset Services and its advisers Brookland Partners and Paul Hastings held a meeting for all noteholders after being inundated with calls, largely regarding whether there would now be a dialogue between the borrower and noteholders outside the ad-hoc committee.
The mood at this meeting was tentative “but not hostile”, according to one attendee. One talking point was that the higher margins noteholders are being offered in exchange for accepting the proposal are lower than many had expected: a 165bps blended margin across all six classes, up from 48bps. All classes are offered the same 116.7bps uplift, so the class As are being offered 140.7bps, up from 24bps now.
By contrast, in BauBeCon, the latest large German multi-family housing CMBS to be refinanced, Deutsche Wohen agreed an €800m package of new seven-year debt with four banks, at 225bps over Euribor.
Furthermore, a month ago, one analyst suggested the step up might be by up to 270bps, based on a 1.33% cost of negotiating a new five-year swap, from 2013, at today’s rates. Deutsche Annington now pays 4.66% across the GRAND debt and does not plan to increase finance costs, so that would leave 3.33% available, or 2.7% after subtracting issuer costs and today’s margin.
Despite these qualms, the borrower and its advisers will be hoping that the heads of terms might be attractive enough to ward off any challenge by subordinated noteholders, who had been prepared to legally challenge the scheme of arrangement at the heart of the proposal if they didn’t feel fairly treated.
The scheme of arrangement is the borrower’s solution to flaws in the original documentation, which didn’t make it clear what the voting thresholds between classes were for amendments to documentation. The proposal is that all classes should vote together on the terms and 75% by value must agree, as well as a majority by number.
This is different from most deals, where each class votes separately and all classes need to vote in favour to carry a change, as happened in April when the fate of the Uni-Invest deal was determined.
The subordinate classes in GRAND will be relieved that repayment will remain on a pro-rata, rather than sequential, basis, unless there is a default. The amortisation promised is also greater than the €500m per year over five years that leaked out earlier during discussions.
Monica Filkova, an analyst at ABS specialist Chalkhill Partners, says: “It’s a balanced approach that makes sure money stays in the deal; there’s very little chance equity will see a disbursement of cash.”
An adviser to the ad-hoc committee, not surprisingly, sees it as a good deal because the company will be able to continue collecting rents and moving towards its goal of an initial public offering, while noteholders get “better economics, faster payback and more certainty”.
Jim O’Leary, head of primary servicing at Capita, says: “It has gone a huge way towards putting something on the table to address the refinancing risk. The sponsor is putting in a lot of equity and there are some very aggressive refinancing targets every year with incentives for the borrower to achieve them.”
Noteholders will be offered a consent fee of 20bps to enter lock-up agreements (early indications of support) during September, or 10bps thereafter. The vote will be held on October 29 and if there are no objections the proposal could be approved on 9 November.
Terra Firma provides solid ground for Deutsche Annington’s equity boost
Under the proposal, Deutsche Annington’s parent Terra Firma would inject €504m: €240m of cash and €239m of CMBS notes owned by the borrower, to be subordinated below all the other classes. A further €25m will be drawn from the refinancing account. This will cut outstanding securitised debt to €3.8bn and the loan-to-value ratio to 59.7%, based on an €8.44bn valuation in January.
The notes will be extended by five years from July 2013. In the first year, €1bn will be repaid (the incentive for the borrower to pull this off is that if the deadline is missed, the margin jumps by 25bps); €700m in the second year; €650m in years three and four; and the rest in year five. The weighted average life will be 2.4 years and the interest coverage ratio will rise to 1.10x from 1.05x.
The company is confident of securing the financing because of the moderate gearing required, plus the fact that the 162,100 multi- family homes underlying the deal are stable assets with good income levels of the kind banks have been prepared to lend against for the past year. Restructuring in separate chunks will also make it more manageable.
GRAND, created in 2006, consists of 29 loans to 29 ‘real estate funding’ issuers, with €5.8bn of notes issued. A further €1.2bn of senior debt is secured against the assets.
Junior noteholders feel left out of GRAND class A club
The group of six class A noteholders that have been negotiating with Deutsche Annington and its advisers Blackstone Group and Allen & Overy for almost a year are BayernLB, ING Investment Management, JP Morgan, Landesbank Baden-Württemberg, PIMCO and Standard Life Investments. They represent 32% of overall bonds (37% including the share held by Deutsche Annington’s shareholders).
Tensions arose because these investors have not been restricted from trading bonds, despite their privileged position, except for in the last two weeks before the refinancing proposal was unveiled. One junior noteholder says: “[The ad-hoc committee] has been secretive so far; we don’t know if they’re going to continue to operate a ‘squirrel club’. If they are, they should at least be ‘off-side’ in terms of any transactions; it’s ridiculous that they’ve been able to trade.”
Subordinated noteholders battled to stay informed during the process and resented the fact that the ad-hoc committee, advised by Rothschild and Freshfields, reflected only a narrow slice of the investors. The noteholder adds: “It is right that there should be some restructuring; the question has been ‘what sort of restructuring, and is it fair?’ You don’t start off well if you don’t take into account all shades of opinion.”
With this attitude, it is not surprising that investors lower down the capital stack might feel that the deal has been tailored to suit the class As. They may also wonder why their uplift is not higher than for others.
On the flip side, they will get some of their money back fast. What’s more, junior positions have been considerably de-risked, given that the interest on the €239m of notes the sponsor holds won’t get repaid until the rest of the refinancing is complete. This means those notes in the middle of the stack have less debt ranking above them.
The pricing of the bonds has leapt in response to the proposed restructuring; in the case of class D notes, from the low 70s to the high 80s of par, and for class E notes from the high 60s to the mid 80s. Senior bonds rose from the low 90s to 97%.