VALAD Europe, the asset manager majority-owned by Blackstone, is set to be appointed as asset manager on Propinvest’s 35-strong Gemini portfolio on a long-term workout, CoStar News can reveal.
CBRE Loan Servicing, the special servicer on the heavily-defaulted Gemini CMBS, is expected to appoint VALAD in the next week or two after concluding the terms of the appointment and agreeing an asset management strategy for the UK portfolio of secondary shopping centres, offices, industrial warehouses and logistics properties, as well as business and retail parks.
The appointment of VALAD is expected to be agreed with the fixed charge receivers - Deloitte’s Phil Bowers and Neville Kahn - and administrators, also Deloitte’s Bowers and Kahn, as well as Rick Garrard.
Seperately, CoStar News understands that Cogent Property Solutions, a Scottish asset manager, will be appointed to assets in Scotland, after first being recommended by CBRE in its original recovery plan three years ago.
The Gemini CMBS and junior loans mature on 17 July 2016, while the legal final maturity of the bonds is extractly three years thereafter - with the likely workout plan expected to fall somewhere between these maturities of circa four to seven years.
VALAD is not expected to sell many properties in the short-term, but instead is likely to implement a recovery strategy premised on focussed asset management to improve capital values over the longer term through the letting of vacant units, restructuring and re-gearing leases as well as repositioning assets within their particular markets.
Early asset sales are expected to be limited to where VALAD determines meaningful value cannot be recovered, or where the risk profile of attemting to increase value is deemed unacceptable.
In advance of the acceleration of the Gemini loan, Barclays agreed with CBRE to waive full crystalisation cost of the swap on loan enforcement, in exchange for an agreed pay-down of the swap over a three-year period.
The restructuring of the swap will allows VALAD to execute the asset management plan without cystralising the current £287.2m in swap breakage costs, which will ensure a greater recovery to noteholders.
This is thought to be the first European CMBS transaction for which this kind of swap negotiation has been agreed with the counterparty.
For VALAD, the appointment will be a huge coup after missing out on the asset management mandate on the Uni-Invest CMBS to TPG and Patron Capital five months ago, in an fiercely-contested battle for bondholder votes.
CBRE and VALAD declined to comment.
The Gemini portfolio comprises 35 secondary properties, with a rising vacancy rate besieged by tenant failures and administrations. The vacancy rate was 16.7%, as at 20 July.
The tenant profile of the portfolio is very granular with more than 300 tenants, having a weighted average lease length of 7.8 years.
The largest 20 tenants contribute 60.19% of the total rent, due largely to the inclusion of 12 single-let properties in the portfolio. As a result, the portfolio is particularly vulnerable to the failure of certain tenants.
In the nearly six years since the portfolio was valued ahead of the November 2006 securitisation by Barclays Capital, the portfolio has fallen in value by around 65% - from £1.235bn to £437.75m, at the end of March 2012 - according to GVA which is currently carrying another six-month valuation update.
GVA’s September 2012 valuation is expected to be published next month.
The outstanding CMBS Gemini loan is £850.36m which, against a £437.75m valuation, puts the securitised LTV at 232.47%. In addition to the £105.24m junior loan, the combined £955.5m whole loan has an LTV of 254.88%.
Chronology of events leading to Gemini loan enforcement
The chronology of events which preceded CBRE’s loan enforcement action six weeks ago are some of the most extraordinary in the entire history of European CMBS loan workouts.
Propinvest initially favoured a borrower-led insolvency, which potentially could have side-stepped swap crystallisation costs, but CBRE deemed the strategy unworkable.
Lazards was then appointed as Propinvest’s adviser, which identified a loan sale option, which would allow an asset management strategy while leaving the swap in place and preventing the erosive breakage costs.
A discreet and comprehensive marketing strategy was then undertaken to find interested buyers for the loan, which identified KKR and Westbrook Partners as a potential joint buyer of the CMBS and junior loans.
Concurrent to CBRE’s pursuance of a potential loan sale, the special servicer was informed by Propinvest that an unpaid circa £15m VAT bill was about to be enforced by HMRC.
Propinvest’s unpaid VAT bill emerged in August 2011, but dated back to 2008 when around£10m of VAT reciepts from tenants were, CBRE alleges, diverted out of Gemini’s general account and paid to a Propinvest creditor unconnected to the Gemini structure, instead of being held in a segregated account and paid to HMRC.
CBRE considered this to be a significant breach of trust.
Although the undrawn £42.15m liquidity facility could have cured the outstanding VAT bill, CBRE was unwilling to prioritise an unsecured creditor ahead of bondholders. It felt there was a lack of clarity over where the original monies had gone as well as an absence of Propinvest’s co-operation over an independent investigation.
Propinvest vigorously disputes this.
But with a potential loan sale led by KKR and Westbrook on the table which could have resulted in the VAT bill being paid in full, HMRC agreed to waive any action against Propinvest, pending the outcome of the loan sale strategy.
The original KKR and Westbrook loan sale offer was proposed on 27 April 2012 which, according to CBRE’s analysis, was inferior to an enforcement route, combined with a swap agreement with Barclays and a targeted asset management plan.
CBRE informally proposed the KKR and Westbrook offer to class A noteholders, which CBRE said overwhelmingly rejected the deal.
A revised offer was then proposed by KKR and Westbrook on 20 July, which was communicated both by CBRE - and directly by Lazards - to the class A noteholder group.
The revised offer was for £375m, comprised of £120m for the loan as well as assuming £275m for the swap, for the outstanding £955.5m whole loan, with an option for class A noteholders to participate alongside KKR and Westbrook in the equity of the new special purpose vehicle.
The offer was again rejected. Furthermore, a loan sale would have - under the documentation of the Gemini CMBS - required trustee approval, which CBRE understood would have put the loan sale option to a vote of all noteholders.
It was CBRE’s assessment that a vote across the entire class of noteholders in favour of KKR and Westbrook’s loan sale option would have failed.
CBRE, therefore, agreed the three-year swap repayment plan with Barclays, to mitigate impact of swap, and then enforced the loan on 6 August.
Next week’s appointment of VALAD begins the next phase of European CMBS’ most eagerly-watched workout.
Maud and Propinvest are understood to be mounting a vigorous defence.
The timing of last month’s freezing order is intertwined with Gemini portfolio as a successful application would enable Grant Thornton to claim around £3m in a surplus account held by Eagle Holdings, the holding company of Gemini, the special purpose vehicle which owns the 34-strong Gemini portfolio.
“We are concerned that the primary objective in Grant Thornton obtaining the order on Tuesday, one day before the Gemini portfolio companies were placed into administration in Guernsey, is to try to seize cash funds in excess of £3m held in the parent company of the Gemini portfolio, the monies of which are properly the property of those companies and their creditors,” Propinvest’s statement said at the time.
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