J.P Morgan, Citigroup and Morgan Stanley are marketing $1 billion of mortgage bonds with signficiant rollover risk.
The bonds are backed by a single mortgage on 1211 Avenue of the Americas, a building whose largest tenant, 21st Century Fox, could vacate before the mortgage is paid off. Adding to the risk, this 10-year loan pays only interest for its entire term, at a rate of 3.91%.
Currently, 21st Century Fox occupies 55% of the Midtown Manhattan property, which is comprised of 1.8 million square feet of office space. The tenant has one, five-year renewal option remaining extending through November 2025; it uses the space for general office use and also has 25,686 sf of dedicated studio space at the building that it uses to produce Fox News Channel programs such as Fox Business News, Fox & Friends, Mornings with Maria and Lou Dobbs Tonight.
However 21st Century Fox has indicated that it needs additional space beyond the 1.1 million square feet it currently occupies. The tenant is exploring a potential relocation to Lower Manhattan and has signed a non-binding letter of intent as of June 2015 with Silverstein Properties for approximately 1.3 million square feet in Two World Trade Center.
Ivanhoé Cambridge and Beacon Capital, the owners of 1211 Avenue of the Americas, have intentionally kept the top three floors (42nd through the 44th) of the building vacant since 2012 in caset 21st Century Fox choses to stay and expand at the property.
To mitigate the potential rollover risk in the transaction, $95.6 million ($90.00 per square foot of the associated space) will be collected and deposited into a lender controlled reserve account, if 21st Century Fox gives notice of its intent to vacate or does not renew at least 36 months prior (November 2017) its lease expiration.
The building is currently owned by a joint venture between affiliates of Ivanhoé Cambridge (which has a 51.0% interest) and a limited partnership managed by an affiliate of Beacon (which has a 49.0% interest). Ivanhoé Cambridge is required to acquire the 49.0% interest in the joint venture by December 31, 2015.
Ivanhoe Cambridge and Beacon used proceeds from the loan, together with a cash injection of $4.8 million, to retire $675.0 million of a senior mortgage and $275.0 of mezzanine loan provided by Lehman Brother (and previously securitized in the LBUBS-2006-C6 and LBUBS-2006-C7 CMBS transactions), pay $55.1 million in prepayment costs, establish a $20.0 million escrow to fund reserves for outstanding tenant improvements and leasing commissions, and pay closing costs of approximately $14.6 million.
Kroll Bond Ratings and Fitch Rating both assigned preliminary triple-A ratings to $590 million of class A notes; double-A-minus ratings to $119 million of class B notes; single-A-minus ratings to $79 million of class C notes; and triple-B-minus ratings to $110 million of class D notes. Fitch rates $136 million of class E notes at 'BB' and Kroll one notch lower at 'BB-'.