A restructuring proposal was released for the troubled European CMBS transaction Fleet Street Finance Two where, among other changes, the maturity date of the single underlying loan and the legal final of the transaction would be extended by three years to 2017.
Deutsche Bank analysts said the legal final of a CMBS deal has never been extended in Europe and 75% of each class of noteholders must vote in favor of the proposal for it to be implemented.
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 AG's subsidiaries Karstadt and Quelle GmbH (Quelle). The CMBS deal was launched in September 2006 with the senior loan secured over a hundred German department stores let to KarstadtQuelle AG.
In September 2009, Arcandor AG and its subsidiaries, Karstadt and Quell, commenced formal insolvency proceedings.
“Success is by no means given but if the proposal is accepted it could see further deals (most likely of the single loan type) attempt to take the same route,” said Deutsche Bank analysts. “Junior note holders can be expected to vote in favor of extending given many such tranches are underwater. Senior bondholders are less incentivized to delay principal recovery but some note holders unwillingness to take the haircut to par which the valuations imply could trump this.”
In the absence of mitigating factors, this maturity extension could be considered to materially impair the economic position of the note holders and therefore likely to constitute a CDE, Fitch Ratings analysts said.
However, Fitch 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 continues to be serviced, to the amortization of the notes which will now be sequential.
The circumstances of the proposed restructuring are unusual due to the insolvency of Karstadt Warenhaus GmbH (Karstadt, accounting for 97.7% of contracted rent), the sole remaining tenant in the transaction. If the restructuring is not approved there is a significant risk that the insolvency receiver will decide to liquidate Karstadt, in which case it could execute its extraordinary right to withdraw from the master lease agreement.
