Eurozone: Views from the White Tower

Robin Marriott

As many visitors to London know, the White Tower is part of the famous Tower of London by the River Thames whose turrets adorn postcards in souvenir shops.

Yet in real estate circles, it is also the name given to a £1.1 billion securitisation of nine UK properties in 2006 by French bank, Societe Generale. Securitisations, one might argue, are not usually the most interesting feature of the private equity real estate landscape. However, this one is being viewed by firms here in Europe as a test case for how troubled CMBS deals might get played out in the near future.

Private equity real estate firms want to know because as borrowers themselves they participated in the late property bull run and many could find themselves in a similar position to the main borrower in the White Tower case. In the UK alone, a study by De Montford University earlier this year suggests about €50 billion of CMBS debt is currently outstanding, but the problem is, there probably isn’t enough capital in the financial system to refinance all the total debt in existence.

Much of it stems from the 2006 and 2007 vintage and given the fall in real estate values since then, many borrowers – private equity real estate included – are in breach of loan to value agreements triggering a default.

This is what has happened with White Tower. Towards the end of 2006, a private investor called Simon Halabi refinanced some A Grade properties including an office occupied by JP Morgan in London. Of the £1.45 billion lent to Halabi, some £1.15 billion was securitised in an issue led by Societe Generale with a final maturity date in 2012. By June this year, however, the wheels were coming off. A revaluation of the security showed a breach of the loan to value agreement and Halabi was thus in default. The value had shrunk from £1.8 billion in November 2006 to £929 million by June this year. When it became clear Halabi was not taking action to remedy the breach, the master servicer, Hatfield Philips, was nominated special servicer to restructure the loan and generally take action to best recover the debt or rectify the breach.

The bondholders were demanding that the loan be called in early to get repayment. In July, there was a slight twist in the process, because the holders of class B notes – ranking below Class A note holders, of course, in terms of repayment ranking – let it be known they did not approve of the appointment of Hatfield Philips as special servicer, so instead they chose Richard Ellis, replacing the firm specified in the original documents.

From the B class perspective, they will find out if it was worth switching firms in due course. What they want is their money

back over a reasonable timescale without resorting to forced sales and if there are opportunities to improve value, to take them. One would imagine that the Class A note holders would prefer early sales as they are likely to be repaid in full even from forced sales, whereas the Class C, Ds, and Es would like to wait until the market recovers and/or asset management improves values.

So far, CBRE has not signalled what it will do with the individual assets, so this is why White Tower is being watched with close interest. The case will highlight what might happen to properties should private equity real estate firms find themselves in a similar position to Simon Halabi.

But it also highlights something else – the vagaries of the European system. I remember being told by bankers in 2006 that the good thing about European securitisations was that deals were “tailor made”. That is, the packages were not sold in US cookie-cutter or “off-the-shelf” style. But that has come back haunt the European market. In the White Tower case, though the Class A bondholders rank first in terms of repayment, under the applicable test emanating from the agreement, it is the Class B note holders who have the power to choose the special servicer. Yet that servicer has a duty to all the bondholders. Cue angst. As David Martin, a director at CBRE’s special servicing group points out, there are other shortcomings of the system too that make servicing difficult.

The special servicer is not in a position to brief one class of bondholders or even all of them to the exclusion of the market generally for fear of infringing Europe’s MIFID insider trading regulations. This could produce a crazy situation where a class of bondholder with consultation rights is too scared to dial into a conference call about the asset strategy in case he is made an insider.

Since the credit crunch began, we have known that certain US securitisations were toxic and had the capacity to bring down the world. But we are just beginning to discover that there is a lot more pain to come.