Guest publication: Berwin Leighton Paisner's Real Estate Debt Restructuring, Enforcing and Trading
Paul Severs, Partner Berwin Leighton Paisner
Many private equity funds, and private equity real estate funds in particular, have been hit hard by the events following on from 2007. Any underlying investment acquired with leverage pre summer of 2007 is very likely over levered now. Whether hard real estate assets, operating businesses, debt instruments or other forms of investment - the issues are similar. How to refinance or structure the old debt by reference to current market conditions?
Equally for many funds with uncommitted available equity there are opportunities. The contraction of advance rates by banks has opened the mezzanine finance area. A number of funds have been launched to cover this space. With hindsight 2008 and early 2009 the AAA part of many ABS capital structures represented good relative value. There were opportunities to buy from forced sellers. There have been forced sales by hedge funds as mark to market triggers were hit. Also some real estate funds that offered redemption options to investors were forced to liquidate prime assets.
On the operating business side the growth in demand for asset servicers, special servicers and related advisory services presents interesting opportunities.
The range of issues being faced by market participants is very wide as investments, investment structures and documentation are tested by reference to market conditions that were never contemplated.
To assist market participants BLP have published a booklet designed to provide a practical reference point for those currently involved in various aspects of the real estate debt markets. It is divided into self contained sections with each section addressing issues commonly encountered within the relevant area addressed. The areas covered are based on the questions and issues we are frequently asked by clients.
The areas covered include market and economic issues associated with real estate, bank debt and CMBS and general supply and demand fundamentals, restructuring, work outs and enforcement. It also deals with the issues related to buying and selling different types of real estate debt, the management and running of data rooms different approaches to due diligence, disclosure and the purchase documentation and tax structures.
The following is an extract from the booklet:
For borrowers, existing holders of debt and buyers or potential buyers, the current value of equity and debt will be significantly influenced by a wide variety of factors in addition to the more obvious factors of position in the capital structure, total leverage, real estate yields and lease run-off dates.
Specific points to consider include the following:
• Government intervention: further government action, including guaranteeing business loans or taking direct ownership of the most toxic loans themselves, many of which relate to commercial property. The government's priority, however, will be consumer and small business loans and the balance sheets of UK banks.
• Globalisation: similarly the globalisation of investors has resulted in a diverse number of investors and investor types and in many cases investors that are not familiar with the technicalities of the debt structures or the role of the parties involved in the overall financing still due. The technicalities of the debt structures create limitations on the range of options available to borrowers;
• Financial innovations: many innovations were introduced into UK debt structures which were untested. Examples of such innovations include B notes, modified pro-rata structures, X notes, available funds cap, servicer advances, servicer and special servicer roles and control party valuation events;
• Experience of staff: resources at servicers, special servicers and trustees may be fully utilised or over-extended, given current market conditions. Careful due diligence by buyers in respect of all service providers is essential;
• Equity providers: there may be more than one equity provider. Equity providers may have differences of opinion and style. Examples are the current workouts within ABS Libra, Plantation Place and the Four Season transactions.
• Level of leverage: highly leveraged loan structures result in multiple investor types at the securitisation level, the B Note level and in certain cases the PIK level as well. This results in a wide range of potential motivations for investors. For borrowers, this results in the need to negotiate with multiple parties with differing incentives;
• Underlying documentation: documentation across deals is not standardised or is drafted poorly or does not address the factual situations that have arisen;
• Counterparty risk: many swaps providers, liquidity providers and other counterparties are presently of a much weaker credit quality than they were when transactions closed. Also close out costs associated with breaking any funding used to be taken into account.
The areas covered in the booklet are the product of practical experience in the market advising investors, banks, borrowers, servicers, special servicers and other participants. For a full copy of the booklet, click here.
For details of Paul Severs, Berwin Leighton Paisner, click here.