Pricoa adopts a mid-Atlantic accent for European dealings

SPECIAL REPORT

Insurer offers US-style loans in Continental property lending campaign, reports Alex Catalano

Pricoa Mortgage Capital hung out its shingle in Europe early last year, one of the handful of US insurers to start a senior lending business in London. Its first deal was a £70m loan on a mainly London office portfolio held by the O&H Group, the private investment company owned by the Gabbay and Shahmoon families.

This year, it wants to lend at least £850m over here and possibly significantly more. “The numbers are not necessarily targets, but an indication of our firepower,” says Drew Abernethy, who moved from the Tokyo office to spearhead European originations.

Back in the US, where it has its head­quarters, Pricoa is called Prudential Mortgage Capital, part of the giant Pruden­tial Financial (no relation to the UK’s own Pru). Last year, it provided $12.2bn of long-term, fixed-rate senior debt for commercial real estate globally.

The motivation for this overseas expan­sion is diversification and the real estate debt drought on this side of the Atlantic has given Prudential Mortgage Capital the opening it was looking for.

As this month’s £273m refinancing of Plantation House in London (done jointly with Pacific Life) indicates, the pace is picking up. “The relationships we’ve started to build, some of the deals we’ve done, are building traction for us,” says Abernethy.

Plantation House will be Pricoa’s fifth European deal. The initial loan to O&H was followed by a supplementary one that added another London asset to the portfolio and recently Pricoa provided Hines with a £48m, seven-year loan to acquire 1 Westferry Circus in London’s Docklands.

“We will see more loans in London and outlying areas, but will also start to look at lending in the UK regions,” says Abernethy.

Pricoa’s maiden Continental funding, a €55.5m refinancing of WP Carey’s six-strong Dutch logistics portfolio, was achieved in May. Original lender ING provided another €19.9m of subordinate debt. Europe – which, for Pricoa, currently means the UK, Germany and Netherlands – is covered from London, where local appointments are expanding the team to five, including David Gingell, associate of European debt originations.

“The recent quick run-up in interest rates has made a lot of people focus on them as a potential problem in the next five years,” says Abernethy. “Borrowers who can take a longer view are excited about locking in debt now and taking advantage of what will probably be historically low interest rates.”

The loans are priced at a margin over Libor or Euribor swap rates; for Plantation House, the 10-year loan all-in cost is around 4.3%.

Safe and steady approach

Pricoa looks for the kind of safe, steady assets insurers love: offices, logistics and retail property, and multi-family housing.

Ditto the loans: up to 65% loan-to-value ratios, from £25m to £200m on solo deals. It is mainly targeting five- to 10-year terms. “We think that market’s a little under-served,” notes Abernethy. “We can go out to 20 or more years, but there are a lot of competitors in the 10-20 year space, and at five or less.”

drewWe’re trying to introduce a slightly different style of lending, which has more flexibility. It gives borrowers more opportunity to run their property and portfolios the way they want” Drew Abernethy, Pricoa

Pricoa is also incorporating some US loan features, a mid-Atlantic approach it thinks will appeal to European borrowers. “We’re trying to introduce a slightly different style of lending, which has more flexibility. It gives borrowers more opportunity to run their property and portfolios the way they want.”

US loans typically have fewer controls in the deal itself, but include so-called ‘bad boy carve-outs’, which give lenders full recourse to the borrower and/or guarantor for certain kinds of misbehaviour.

“In Europe it is more common to have tighter property controls. We offer something more along the lines of a secured corporate loan, but structured as a non-recourse, single-purpose vehicle loan,” says Abernethy.

“We don’t include bad boy carve-outs, but as we think we’re picking the right clients and properties, we’re more comfortable setting the property-level covenants at thresholds that don’t get in the borrower’s way to run the property,” Abernethy adds. “Portfolio lending is a place that our approach and flexibility can really shine.”

In practice, this means allowing borrow­ers more flexibility about substitutions in portfolios, ‘comfortable’ leasing thresholds before needing lender approval, and LTV and debt coverage ratio covenants that aren’t designed to trip them up, but to stop the bleeding in a poorly performing property.

For example, the debt for Plantation House does not include loan-to-value covenants.

As with most fixed-rate debt, there are make-whole provisions in case of pre-pay­ment. But Pricoa also takes the more relaxed US attitude towards selectively letting the loan travel with the asset.

“We allow our debt to be potentially sold with the property, which as interest rates rise, will have more value to a borrower,” says Abernethy. “If the real estate is performing and the transferee an experienced, finan­cially strong real estate owner, we are usually happy to have our debt be novated.”

This kind of longer-term finance is gaining momentum with borrowers in Europe. “We’re not only looking to service our US clients in Europe, but also looking to create new European relationships and potentially work with them in the US and Asia,” says Abernethy.

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