Opera Uni-Invest Transaction
The sale of distressed real estate loans from a CMBS structure in connection with a seller’s financing through bond holders – until recently, it would have been considered impossible what was achieved now during the restructuring of the Opera Uni-Invest transaction.
In 2005, Eurohypo financed about 200 commercial real properties of the real estate fund “Uni-Invest” located in the Netherlands and contributed these loans into the CMBS structure “Opera Finance”, which had an initial volume of about EUR 1 billion. The economic risk of the credit was thereby passed on to the bond holders. The servicing arm of Eurohypo took over the management of the engagement for the bond holders.
After a failed IPO of the fund and a difficult development of the apparently rather second-class real properties with significant vacancies, the repayment of the loan was in danger. Due to payment defaults, the loan was in default from February 2011. In February 2012, a payment default of the CMBS bond occurred, since the bond holders could not be repaid in time – the probably first CMBS default on the bond level in Europe.
During the subsequent work-out by the servicer, it became clear rather quickly that the transaction could be stabilized only through a comprehensive restructuring that involved the bond holders. Two competing solutions emerged, which were submitted to the bond holders in April 2012 for their vote.
On the one side, the Valad Property Group offered a consensual restructuring, where it should take over the asset management of the real properties. This did not provide for an equity participation of the bidder. The goal was to stabilize the portfolio by selling off and repositioning the real properties. Valad would have received 50 percent of its remuneration only upon successful repayment of the A-tranche. It would have been necessary to postpone the repayment of the bonds until February 2016. Junior bond classes would have had to expect a significant loss depending on the future restructuring success.
On the other side, a joint venture of Texas Pacific Group (TPG) and Patron Capital presented a so-called “Credit Bid”. According to it, an SPV will acquire the distressed senior loan. The bond holders of senior A receive an immediate cash payment of 40 percent of their tranche, but simultaneously provide a new loan with a loan to value of 60 percent and thus a seller’s financing. Additional debt financing comes from a bank loan in an amount of EUR 215 million. The junior classes B through D, however, drop out completely.
During the note holder meeting, a vote was first cast about the Valad bid. Here, a 75 percent consent in all classes would have been required. As expected, this was not achieved in the A class. The creditors voted on the offer of the joint venture next, where the 75 percent consent of only the A class was sufficient, which was reached easily. The offer of TPG/Patron Capital was thereby accepted. Market observes had feared that both offers would fail, that the transaction would not be restructured, and fall into a “zombielike state”.
The transaction is remarkable due to several reasons. First of all, the sale of the senior loan out of the CMBS structure has been untypical so far, because the loan servicer is often expressly prohibited from doing so under the servicing agreement. In many cases, only a resolution of the bond holders can make this possible. The sale of the loans at Opera Uni- Invest was not the first sale out of a CMBS structure: a loan sale from January 2012 has been confirmed by the market, which occurred with a significantly smaller volume of about EUR 5 million. It evidences that this new exit opinion will be available in the future also for the smaller-scale mass business of loan servicers.
On the other side, the seller financing was impressive. Financing by the seller had been very common during the last several years when selling loans, B notes, etc. The sellers were mostly banks, who were nevertheless able to reduce their risks significantly through a seller financing of a sale. For a CMBS vehicle as such, on the other hand, it is not possible to issue additional loans; unlike the bond holders, who provided in this deal a special form of (indirect) seller financing.
Furthermore, it had an impact that the bonds had already become due for repayment (so-called “legal final maturity”) and that a default had occurred on this level. This changes the rules again for the participants within the CMBS-structure and facilitates a realization/restructuring.
The voting process in the creditors’ meeting deserves particular attention. Different majorities were necessary. Regrettably, there is no uniform structure for this in European CMBS, which is why it has to be examined very carefully during each transaction, whether individuals are able to block decisions of the bond holders that are necessary for the restructuring. The fear was that there are A class creditors, who are also invested in the failing classes B through D and would therefore obstruct a decision within class A. This risk was not realized, however, but it shows that interests may be contradictory even within a single bond class.
Since the CMBS bonds are listed securities, the issuer is required to publish price-relevant information on the relevant stock exchange. The corresponding announcements about the restructuring efforts and the two competing offers were analyzed by analysts and publicly commented on, resulting in a transparent and open bidding process.
The current decision of the bond holders shows again that it is possible to enter into a productive dialogue with the initially anonymous mass of bond holders – an informal steering committee of the most important bond holders was established in the transaction – in order to reach a economically viable solution.
IMPACT ON DAY-TO-DAY BUSINESS
Due to its complexity and the numerous participants, CMBS transactions were initially considered as incapable of being restructured. The market has gradually developed feasible solutions and outstanding restructuring solutions are repeatedly used as blueprints for subsequent transactions. The Highstreet transaction of 2010 should be mentioned as an example here. During the course of the restructuring of the financing of the Karstadt real properties, it was necessary to align the interests of a CMBS structure (Fleet Street Finance Two), a special mortgage bank (Valovis), and of various mezzanine creditors. For the first time, the term of the CMBS bonds was extended by a vote of the bond holders, which significantly simplified similar restructurings afterwards. Something similar can now also be expected after “Opera Uni-Invest”.
At the same time, the loss of the bond classes B through D crystallized the fear that a significant capital cut is necessary in the case of economically weak CMBS bonds before any structure can be placed on a new economic basis.
This is of particular importance for the European market for distressed real estate loans. Opportunistic funds as potential buyers have been ready for some time again and debt capital is proven to be available for the acquisition of distressed loans. However, German banks are currently reluctant as sellers, since they first of all trust in their own work-out capacities and since they secondly (still) feel little selling pressure.
If the CMBS vehicles, which have so far rather been on the sidelines, position themselves as sellers now which may resolve the urgent CMBS refinancing question at the same time, trading in real estate loans will be facing interesting times. Morgan Stanley anticipates EUR 48 billion in expiring CMBS loans for the next three years alone – with a focus in the UK and Germany.