When Goldman Sachs bought a 51 percent stake in the properties leased to a department store chain in Germany in 2006, naturally it was part-financed through a CMBS transaction. So too was the subsequent purchase of the remaining 49 percent stake by RREEF, Pirelli Real Estate, Generalli and the Borletti family in 2008.
The retail world of 2006 though was a considerably different beast to the one seen today and since closing the €4.5 billion deal for Arcandor’s Highstreet Portfolio – which gave the firms ownership of 79 department stores operated by Karstadt, as well as a number of smaller assets – things have not gone as planned for the buyers.
Arcandor and its subsidiary Karstadt filed for insolvency in June 2009 and since then the receiver has put into place an insolvency plan involving an option to sell the chain to a third party. To date, some 30 Karstadt stores have already been vacated.
However, with a July 2010 maturity date looming on a €1.12 billion CMBS loan called Fleet Street Finance Two secured against parts of the Karstadt portfolio, the alternative of liquidation could have been an even worse – yet extremely real – possibility for the property funds in question. According to a valuation by Cushman & Wakefield at the start of 2010, the portfolio of 47 stores and other assets used as security for the CMBS loan, and covering 778,000-square-metres of space in cities such as Berlin, Hamburg and Munich, would be worth €1.57 billion if Karstadt was sold as a going concern, but only €713 million if it was liquidated.
With that in mind, an agreement in February by the CMBS bondholders to extend the debt maturity to 2014, in the hope of finding a buyer for the whole chain, has brought the property funds some much-needed relief.
“The bondholders were concerned about the overall picture,” said one person close to the agreement. “If the right package had not been agreed for the borrower who is the landlord, the Karstadt receiver might have decided to throw in the towel and put it into liquidation.”
The agreement is thought to be the first time that bondholders in Europe have agreed to an extension of a large CMBS transaction, according to experts spoken to by PERE.
There are both pros and cons for the borrowers in the restructuring.
In the borrowers favour is that the loan maturity has been extended by three years and there has also been an extension of the note maturity by three years – the first in the CMBS market in Europe.
The borrowers also got a waiver of a loan-to-value covenant breach in January this year and are being allowed to reset the loan-to-value covenant from the current 70 percent to 90 percent in January 2011, 85 percent the next year and then 75 percent in 2013 and 2014. They do not have to inject any fresh equity, either. Though the borrowers have to pay restructuring fees, they have avoided commitment fees. The agreement is not even dependent on the outcome of a new credit rating in the wake of the restructuring and they will continue to collect management fees too.
For the bondholders there are some benefits as well. For one thing, it has allowed the Karstadt insolvency plan to proceed. They can expect the restructuring to increase the probability of the tenant surviving and the future tenant being solvent when the chain is sold to a third party. The margin on their loan has also been increased by around 50 basis points.
There are other advantages too, but the main issue is that the agreement has pre-empted a potentially lengthy and acrimonious default and standstill negotiations with Goldman Sachs and the other borrowers.
It is not over yet, though. The future of the investment is still heavily dependent on how Karstadt’s situation is resolved. It is not yet clear if it will emerge from administration. Europe will be watching.
Capita Asset Services is the servicer. Brookland Partners and Paul Hastings are advising Capita.