A report out today casts a shadow over so-called “OpCo – PropCo” structures used by private equity firms, with advisory firm Bishopsfield Capital Partners suggesting they face a looming refinancing challenge.
It says a majority of legacy OpCo-PropCo real estate structures are unlikely to secure refinancing in their current format from either banks or capital markets.
The challenge facing OpCo-PropCos is exacerbated by €50 billion of CMBS transactions requiring refinancing between 2012 – 14, reduced bank balance sheets, weak valuations and funding gaps within legacy vehicles, according to Arjan van Bussel, partner and co-author of ‘OpCo-PropCo: a redundant technique or here to stay?’.
The report suggests that whole business securitisations and credit tenant leases present alternative refinancing options, particularly for OpCo-PropCos with specialised and illiquid property assets.
Vehicles containing high quality and more liquid real estate – high street retail and offices – should seek outright asset sales where possible, it also recommends.
van Busse said: “Funding gaps will require stakeholders in OpCo-PropCo structures to suffer pain. The question of how much will be a function of the market capacity under different market structures, such as outright property sales, whole business securitisations and credit tenant leases. 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.”
However, the report says the rationale for OpCo-PropCo structures remains valid despite high-profile failures including this year’s collapse of Southern Cross Healthcare. Financing terms, such as leases with rising rents that prove unsustainable in business downturns, are seen as responsible rather than the structure itself.
“Preserving the sound financial health of the OpCo is paramount and certain structural features, such as retention of an element of property sale proceeds in the OpCo or performance based transfer of properties to the PropCo, could support this objective,” the report says.
“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. 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,” added Amir Khan, co-author of the report.
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