Refinancing sets up victim of Spanish crash to compete with new REITs, says Doug Morrison
Colonial, one of the biggest corporate casualties during Spain’s property crash, can reasonably claim that 2014 marks the start of its recovery in earnest, following years of behind-the-scenes negotiations between creditors, shareholders and the board. In April, shareholders approved a plan to refinance €1.04bn of debt and, according to one senior source in Madrid, Colonial, which is listed on the Spanish stock exchange, is back in buying mode again after years of being virtually dormant.
A new, €1.04bn syndicated loan, repayable in December 2018 with a spread of 400 basis points over Euribor, has been secured on Colonial’s Spanish assets – mainly offices in Madrid and Barcelona – and its 53% stake in French property group Société FonÇiere Lyonnaise (SFL). Colonial’s latest financial statement, published in May, reveals that the loan-tovalue ratio must stay above 58% and the interest cover ratio no lower than 1.25x. The current LTV level is 75%. The new loan, together with a €1.26bn share issue, has allowed Colonial to repay all of its syndicated debt, plus almost all of its bilateral loans, which were taken out in 2007 and restructured in 2008 and 2010. Since the restructuring, the group has a pro-forma €2.4bn of debt and a net loan-to-gross-asset-value ratio of 40%.
spanish property resurgent
Most encouragingly, the new loan was oversubscribed and the new lenders are mostly international, indicating that Colonial is now belatedly in step with Spain’s resurgent property market. The new loan was arranged by Crédit Agricole and other participating lenders include GIC, AXA, Generali, BAWAG, ING and Banc de Sabadell.
None of this would have happened without the support of Juan-Miguel Villar Mir, the industrialist and chairman of Spanish contractor Obrascón Huarte Lain. Villar Mir’s eponymous investment group bought 19.33% of Colonial from Royal Bank of Scotland in January, for €1 per share, representing a 14.5% discount on the previous day’s closing price. As the prime mover behind the financial restructuring plan, Villar Mir had beaten a rival bid for control of Colonial by Canada’s Brookfield Asset Management, which, as one of the Spanish company’s largest creditors in January, had tabled an alternative restructuring plan.
Villar Mir has not looked back. As a result of the restructuring, its stake increased to 24% – short of the 30% that would trigger a formal takeover but enough to make it Colonial’s largest shareholder. As Real Estate Capital went to press, Colonial’s shares languished at €0.62, giving the company a market capitalisation of €1.96bn, which means that Villar Mir’s reward for its investment is more in expectation than actual value. Then again, the refinancing has brought in new institutional shareholders, including Henderson Global Investors, which recently took a 3.69% stake.
qatari money comes in
The most notable newcomer to the register, however, is Qatar Investment Authority with a 13.1% stake, offering some ballast to Colonial’s recovery as well as an important show of faith from a group that usually invests for the long term. Such confidence in Colonial has been a
long time coming. The restructuring breakthrough was the final stage in a convoluted process that dates back to 2008, when Colonial was in the mire and its main creditors included Crédit Agricole, Eurohypo, Goldman Sachs International and Royal Bank of Scotland.
Though Colonial avoided the headline grabbing fiascos that, for instance, blighted Metrovacesa’s reputation, much of its expansion during the boom was nonetheless ill-conceived and expensive, including an investment in construction services group FCC. Colonial’s takeover of shopping centre developer Riofisa in early 2007 was especially damaging, with Colonial paying €2bn for the business – double what some
critics believe it was worth.
“The whole thing was ludicrous and built on debt and when the market bottomed out, so did Colonial,” according to one Madrid-based consultant. By the time Juan José Bruguera joined as president of Colonial in 2008 the company’s debt had spiralled to €4.9bn. Bruguera has since presided over Colonial’s exit from its unfortunate investments and a series of debt-for-equity deals by the original creditors.
French group SFL, in which Colonial holds a majority stake, remains important to Colonial’s immediate future (see below). It is understood that BNP Paribas was instructed last year to test market demand for the SFL stake and attracted a lot of interest before Colonial’s new shareholders,
led by Villar Mir, forced the board to abandon the sale in March.
Brookfield’s thwarted takeover proposal for Colonial, meanwhile, involved selling a large part of the SFL stake to raise capital. By March, David Brush resigned as Brookfield’s head of Europe, to become chief investment officer of Spanish REIT Merlin Properties to lead its planned initial
public offering. Brush’s departure from Brookfield effectively signalled the end of the Canadian group’s interest in Colonial.
In a May 7 statement to its shareholders, Brookfield said: “As part of our strategy of investing in Europe, we acquired $1bn of debt in a Spanish real estate company. Instead of converting the debt to equity, we were repaid at par, which led to a profit on this investment over the past five months of ±$150m for our opportunity fund.”
A spokesman for Brookfield confirms to Real Estate Capital that the group “no longer has a debt or equity position in Colonial”. As for Colony and Orion, having sold their stakes in Colonial earlier this year, they have since come back in with a 9.5% interest, despite backing Brookfield’s alternative strategy for Colonial. Orion declined to comment on its intentions. Other commentators have expressed doubts about Colonial’s SFL holding, which effectively means Paris offices account for more than half of the group’s gross assets.
doubts about paris assets
In a new note on Colonial, Morgan Stanley analysts suggest that although the French assets “offer high-quality exposure, we think Paris office fundamentals will remain challenged for longer and this will be a drag on performance”. But they also praise the “€1.1bn of high quality and well-located offices” in Madrid and Barcelona and the “strong momentum” in those markets, which they predict will underpin several years of double-digit growth in net asset value.
The big question raised by Morgan Stanley is how Colonial will fare compared with the new generation of listed Spanish REITs, such as Merlin. The market will find out soon enough. One Madrid-based consultant says that as well as stopping the sale of the stake in SFL, the new shareholding regime has forced management to shelve sales of assets – some of which had gone under offer – preferring to keep the stability of the income stream. “Their reputation is pretty good,” he adds. “They are a good operator and they understand the market. They’ve been dormant for many years but the feedback now is that they want to get back into the market and start acquiring again.”
Private equity players vie for French prize
The jostling for control of Colonial was evident as early as December 2009, when Goldman Sachs sold its debt in the group to a joint venture between private equity firms Colony Capital and Orion Capital Partners – the latter through its Orion III Fund.
Via a vehicle called Coral Partners, Colony and Orion were able to convert that debt into a 14% shareholding and by January this year they had aligned themselves with Brookfield. For both parties, the deal’s big attraction was Colonial’s 53% stake in French group Société Fonçiere Lyonnaise, which was the key to Colonial’s survival in the downturn.
It is widely accepted that when Spanish property values collapsed between 2007 and 2013, the only thing supporting the operation was the strength of the Paris office market, in the form of the annual SFL share dividend. Brookfield has now cashed in its investment in Colonial, at a profit, while Colony and Orion split Coral Partners and the shares in June.