Securitization market participants welcomed Deutsche Annington's July 10 announcement of German Residential Asset Note Distributor's (GRAND) proposed loan restructuring.
Moody's Investors Service analysts, for one, said in a report that the overall impact of the restructuring should mitigate the risk in the very large amount of debt due to be refinanced in 2013.
GRAND is the largest European CMBS and a benchmark German multifamily securitization. It was originally a €5.4 billion ($6.64 billion) CMBS sold in the summer of 2006 at the height of the structured finance boom. The sale was a result of investor Guy Hand's private equity vehicle called Terra Firma Capital Partners purchasing Deutsche Annington and Viterra a year earlier.
The CMBS deal includes €12.4 billion of German multifamily debt across 45 distinct loans.
The restructuring has been one year in the making, but CMBS analysts believe that the terms are likely to be successful.
After the announcement, the bonds' value in the secondary market rose across the deal structure.
Bank of America Merrill Lynch analysts reported that the Class A notes rose 3.15 points to a 96.90 bid price, the Class B notes were up 7.0 points to 92.00, the Class C notes were up 8.5 points to 89.25, the Class D notes were up 12.5 points to 87.25, the Class E notes were up 18.75 points to 86.25 and the Class F notes were up 21.8 points to 85.8 as of July13.
"If ultimately accepted, we expect the restructure to lead to a further 're-rating' price wise of the GRAND stack, and think further significant price appreciation, as much as 10 points, is possible - particularly in the mezzanine and junior notes," said Deutsche Bank analysts in their July 26 European weekly report.
This strong price appreciation will be positive for the restructuring proposal that requires the approval of 75% of all noteholders, Deutsche analysts explained. The deal is structured based on the legal agreement that no creditor is disadvantaged if the transaction undergoes a restructuring. In terms of GRAND, this would mean that 75% of the total noteholders by value and a majority by number must approve its restructuring.
"In our opinion, it makes no sense at current pricing levels, given the terms of the restructure, for any noteholder (across the classes) to vote against [it]," Royal Bank of Scotland analysts said in a recent report. "Even in the senior note the alternative of an enforcement procedure would likely return principal close to the legal final today of 2016 - implying a worse return than voting for the restructure."
More than 50% of the monetary amount is found in two deals - GRAND and GRF 2006-1, and the top 10 loans account for 73% of the balance. According to a transaction update in 2011, following two tender offers, the sponsor-affiliate owned €298.1 million initial notional of classes C, D and F, translating into a €228 million outstanding principal balance as of April 2012.
The restructuring proposes a five-year extension on the loans to 2018 and CMBS notes to 2021, versus 2013 and 2016 today; a 116.7 basis-point step-up in margin on the notes across the board with the option of a further 25-basis-point step-up if the first year's paydown is less than €1 billion; and an accelerated paydown of targeted mini-refinancing of up to 2018.
An equity injection of €504 million comprises a cash injection of €265 million by Deutsche Annington (applied pro-rata) and an exchange of notes on a one-to-one basis for a new "S" class of subordinate notes. The issuer has already committed its group holdings of €239 million GRAND notes to this. With the equity injection and a new 2012 portfolio valuation, the GRAND LTV would be reduced to 59.7%.
Deutsche Annington said in its announcement of the restructuring that 32% of GRAND noteholders were represented on the ad-hoc committee that worked on the terms of the deal.
Barclays Capital analysts wrote in a July 16 securitization report that the terms of the restructuring are also much more noteholder-friendly than originally expected. "The debt extension is less than envisaged and the equity injection, to a large extent achieved by converting debt held by an affiliate of the sponsor into deeply subordinated notes, is higher than we expected. In addition, the cash sweep elements post-restructuring are very strong, in our view," they said.
