Extensions have become one of the latest loss-saving measures in European CMBS transactions after noteholders voted in favor of what would be the first extension of a European class of CMBS notes' legal maturity date.
Sidley Austin's London-based international finance group restructured approximately â¬3.5 billion ($4.8 billion) of debt, including around â¬1.13 billion of CMBS notes issued via Fleet Street Finance Two.
Fleet Street Finance Two is a single-borrower securitization backed by a portfolio of department stores located throughout Germany, all of which are leased to Arcandor's subsidiaries Karstadt and Quelle. The CMBS deal was launched in September 2006 with the senior loan secured over a hundred German department stores let to KarstadtQuelle.
The transaction is the first CMBS securitization in Germany and Europe to be fundamentally restructured. It is also one of the largest and most complex restructurings in the German market. The principal reason for the restructuring was the sole underlying tenant, Karstadt, going into bankruptcy in Germany.
In September 2009, Arcandor and its subsidiaries, Karstadt and Quell, commenced formal insolvency proceedings.
The restructuring included an extension of the maturity of the various classes of bonds issued in the transaction, and in the legal final maturity would be extended by three years to 2017. It also included an increase in the coupon payable to certain classes of bondholders.
By having a final rated maturity that is well into the future, the CMBS structure allows servicers to be able to take a more patient, longer-term approach to weather periods of illiquidity versus holding fire sales on performing assets.
Fitch Ratings said that the other terms of the restructuring proposal sufficiently mitigate the negative impact of the maturity extension. These include the margin increase of approximately 52 basis points to all note classes (decreasing over time due to amortization) and the diversion of all excess cash from both the mezzanine debt and the equity - which currently continue to be serviced - to the amortization of the notes that will now be sequential.
Fitch analysts also said that it's likely that this period of illiquidity will not last forever.
"At some point, be it two, three or five years from now, the market for commercial real estate will return," analysts said. "Equity will be available for the four major asset classes at yields of 8% to 10%, and leverage will be available with a debt yield in excess of 11%."
The option could prove a growing trend for CMBS borrowers faced with refinancing in today's market.
"The restructuring of the CMBS notes could pave the way for the renegotiation of billions of euros of complex property financings," said the Sidley Austin partners that worked on the Fleet Street transaction. "Many investors in CMBS have struggled to restructure these complex financings as the property backing them has plummeted in value."
Euan Gatfield, a Fitch Ratings analyst, said that the availability of this course of action dispels the automatic assumption that structured vehicles inevitably become forced sellers as they approach legal maturity.
The legal final of a CMBS deal has never been extended in Europe because 75% of each class of noteholders must vote in favor of the proposal for it to be implemented. In the case of Fleet Street Finance Two, one bondholder described the restructuring as "an enormous task" because of the large number of lenders involved.
However, junior noteholders had been largely expected to vote in favor of extending given that such tranches are the ones that are primarily underwater. Senior bondholders are less likely to delay principal recovery, although some of those noteholders' unwillingness to take the haircut to par, which the current valuations imply would happen, could make even the senior holders want an extension, Deutsche Bank analysts said.
The proposed note extension is the latest in a series of measures that European CMBS transaction parties have employed to avoid losses, Standard & Poor's, analysts said.
Other measures to address potential defaults have also been evident in the transaction parties in Opera Finance (Uni-Invest) and Radamantis (European Loan Conduit No. 24) PLC., according to S&P analysts.
In both of these deals, the use of loan restructurings and standstill agreements has meant potential loan defaults appear to have been avoided as loans approached or reached their maturity dates.
"We consider that despite delaying enforcement proceedings and the ultimate recovery of principal receipts, extensions and standstill agreements can help to reduce losses if, for example, the refinancing burden is reduced through amortization or excess cash trapping, or if refinancing conditions improve," analysts said.