Operating Company/Property Company or OpCo-PropCo real estate structures need "creative thinking" with the impending refinancing challenge on the horizon, according to a report by European structuring and advisory services firm Bishopsfield Capital Partners released yesterday.
The report is titled OpCo-PropCo: a redundant technique or here to stay?
Most legacy OpCo-PropCo real estate structures are probably not going to secure refinancing in their current format from the banks or the capital markets, the report said.
The firm suggested that whole business securitization (WBS) and credit tenant leases (CTL) present alternative refi options, specifically for OpCo-PropCos that have specialized and illiquid property assets.
Bishopsfield said that vehicles that have high-quality and more liquid real estate – high-street retail and offices – should pursue outright asset sales where they can.
The challenge facing OpCo-PropCos is made worse by several factors. These are: €50 billion of CMBS deals that need refinancing between 2012-14, reduced bank balance sheets, weak valuations and funding gaps within legacy vehicles, said Arjan van Bussel, a partner of Bishopsfield and co-author of the report.
“Funding gaps will require stakeholders in OpCo-PropCo structures to suffer pain," van Bussel said. "The question of how much will be a function of the market capacity under different market structures, such as outright property sale, WBS or CTL. The post-crisis bank market is not deep enough to refinance large loans and the syndication market has also been adversely affected by the credit crisis.”
The reason for OpCo-PropCo is still valid even with the high-profile failures such as 2011's Southern Cross Healthcare collapse, the report said. Financing terms, including leases with rising rents that prove unsustainable in business downturns, are the perceived reasons behind these failure instead of the deals' structure.
Preserving the OpCo's sound financial health is important, the report said. Additionally, certain structural features, including the retention of an element of property sale proceeds in the OpCo or performance based transfer of properties to the PropCo, can be supportive of this objective.
“In the absence of a vibrant CMBS and B-note investor base, we believe borrowers will have to look at alternative investor sources with different risk profiles," said Amir Khan, co-author of the report. "Replacement of legacy OpCo-PropCo structures with a new instrument is less a function of the underlying model than a consequence of factors affecting the European property financing market and global economy.”
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