Opera’s final act is a tragedy for junior Uni-Invest tranches

Sale to TPG and Patron Capital leaves subordinate noteholders empty handed, writes Jane Roberts

“Even with hindsight, we wouldn’t have done it differently,” says Caroline Philips of Eurohypo, the special servicer to the Opera Finance Uni-Invest CMBS, which was sold last month. The two-year struggle to maximise recoveries for lenders to distressed Uni-Invest, a Dutch property company with 203 assets, ended with subordinate note- holders losing their outstanding principal.

Subject to court approval, the company was sold via a sale of security in the shares, to TPG and Patron Capital for an effective price of €359m – the principal of the class A notes. It currently carries €743m of debt: a €601m senior loan at a 75% loan-to-value level, securitised as four tranches, and an additional €142m mezzanine loan.

Eurohypo and its adviser Cairn Capital had also offered noteholders a consensual solution that would have kept the existing structure for another four years and the subordinate classes in the deal – but this didn’t get enough class A votes.

“The April 17 EGM saw the resolution of this dual-track strategy, which hadn’t been seen before in the market,” says Philips. “Pursuing a consensual option and the credit bid option kept both sides honest and helped preserve value. We’re pleased it worked.”

TPG and Patron paid 40% of the class A’s principal upfront – effectively the buyers’ equity in the deal – and agreed to issue new four-year loan notes at the market rate of 300 basis points over euribor.

Even with additional payment-in-kind interest of 100bps, to be repaid out of future asset sales, in today’s financing market this doesn’t seem like expensive debt for a big portfolio of secondary assets. It seems a good outcome for both TPG/Patron and the class A noteholders.

One option in 2010, when the loans failed to repay at maturity and tipped into special servicing, could have been to enforce without consulting noteholders. But Philips says they hoped the borrower could work towards an orderly refinancing through asset sales and amortisation. “It was a judgement call and had we enforced, it was still likely we would have suffered losses on the senior loan.”

Consensual approach fails

When, a year later, Uni-Invest didn’t meet the targets, Eurohypo convened an all-class committee to try and agree a consensual restructuring and brought in Cairn. But a junior noteholder blocked the proposals.

Peter Hansell, head of property at Cairn Capital, says: “Some noteholders are very disappointed that this could not have been solved at the consensual restructuring stage, but that’s a risk of investing in public debt.”

He believes a big issue for CMBS deals is whether it is right “for junior noteholders to retain control when they’re out of the money, or whether control should flip at appropriate points. It’s about value, interest coverage and risk… changing dynamics for people with a genuine interest from a value perspective, so if you’re out of the money, you should not necessarily be able to hold everyone up.”

Uni-Invest’s road to default

Feb 2010 Uni-Invest enters standstill agreement due to inability to repay senior and mezzanine loans. Two years to legal final maturity of CMBS. Feb 2011 Fails loan amortisation target, triggering standstill default. Special servicer Eurohypo convenes all note class committee to consider Uni-Invest consensual restructuring proposal. Receives five third-party offers of new equity and two creditor-led consensual restructuring proposals. June 2011 A junior noteholder blocks proposals; committee disbanded. Eurohypo starts enforcement of security for senior loan via auction of company’s shares, to maximise recoveries for the noteholders. Jul-Nov 2011 Seven offers received; two bidders invited to second auction round.

30 Nov 2011 Auction abandoned as lack of debt finance means bids are too low to sell security on terms acceptable to noteholders. Dec 2011 Eurohypo convenes ad-hoc class A noteholder committee. 15 Feb 2012 Opera Finance Uni-Invest becomes first European CMBS to default. Two options are considered: consensual deal where CMBS would be restructured, Valad appointed as third-party asset manager to manage/sell properties in the hope of some return on investment to all noteholders; and enforcement option involving sale of loan to a third party, change in ownership of Uni-Invest and return only to class As. 17 April 2012 Class D, C and B noteholders vote for consensual restructuring, but class As reject it and later vote for enforcement proposal from TPG and Patron Capital.