Structuring esoteric debt that suits all parties

Romanian investor Globalworth raised leverage for crown jewels via a Cairn-led bond, reports Jane Roberts

Debt adviser Cairn Capital’s specialism is customised real estate financings, usually via the capital markets and often on esoteric deals.

So when Globalworth Real Estate Investments, an AIM-listed property company that develops and invests in Romania, wanted a chunky €180 million loan to leverage its crown jewels in Bucharest, CEO Ioannis Papalekas picked up the phone to Cairn.

Everything about Globalworth’s requirement was fine – except it was a deal in Romania, and the fact the country is not a deeply liquid, core real estate market in the eyes of many European investors in the asset class meant it was probably not a bankable proposition.

As Cairn director David Henriques says: “This was a great sponsor, great buildings, great assets, with some very strong tenants. If that were in the UK, it would be a completely bankable deal. But the fact it’s in Romania, and the fact that it was so big in the context of the Romanian market, meant that it was ideal for our advisory team.

“First and foremost,” he continues, “we at Cairn are fundamental real estate lenders, or fundamental real estate advisers; so, if the underlying real estate makes sense, and the risk-return makes sense, regardless of risk profile/rating, we will look at it.”

Cairn was introduced to Globalworth by a previous client, Pangaea, a specialist in Greek real estate for whom Cairn had structured a €237.5 million bond to finance the investor’s National Bank of Greece property portfolio.

For the Romanian client, the solution was also to structure a bond, to be placed privately with fixed income investors looking for real estate debt investments with a bit more yield.

Cairn itself, as a manager of discretionary credit funds as well as an adviser, likes to structure debt which its own funds can co-invest in and it was a participant in this deal.

In May, a uni-tranche €180 million bond was pre-placed with one main investor, Canada Pension Plan Investment Board subsidiary CPPIB Credit Investments, which took €150 million, while Cairn took €30 million, invested in two of its funds.

The bond is listed on the Channel Islands stock exchange and pays a 7 percent coupon. The leverage is just under 54 percent loan to value and it is secured on four newly-built properties in the Floreasca business district just north of central Bucharest. Papalekas’s company developed and built the largest, the 525,000 sq ft Globalworth Tower and a residential block, and bought two adjoining office buildings. It is the first property investment in Romania for CPPIB.

This solution took a lot of work, about 18 months’-worth as Henriques and head of real estate debt, Peter Hansell, explain. “It requires a staggering amount of due diligence,” Henriques says. “For instance, we had to get completely comfortable with the Romanian legal environment. Could you foreclose? Could you take security?..These are deals which all sides have to be completely committed to over a long time. As such, a great deal of trust between borrower and lender is developed through the process, and all sides have to be prepared to stay the course.”

“An interesting thing about it,” adds Hansell, “it is structured as you would expect a non-recourse, real estate financing to be structured, but there’s a guarantee from the parent, essentially a hybrid and secured corporate bond. Furthermore, while it’s a securities deal, the approval or voting rights, the sorts of things that you’d typically expect to be given to a servicer or a facility agent, have been retained by the noteholders, so it looks like a syndicated loan in note form.”

Cairn invested for its opportunistic credit fund “which can invest across the spectrum of fixed income assets,” Hansell says, and also for its first vehicle to focus only on European real estate debt which was launched last February with €50 million of seed capital from Cairn majority shareholder Mediobanca.

The Cairn European Commercial Mortgage Fund is so far 80 percent invested in five deals. With Cairn’s fund and other CRE debt investors “looking for risk away from the traditional”, secured on good quality assets “that don’t fit the classic banking market,” Hansell is confident there will be ample future lending opportunities for non-bank credit managers.