Managers are increasingly taking nuanced approaches to acquire junior loans held against real estate assets in a bid to eventually take control of them.
Take for example the recent Woolgate Exchange acquisition. In a bid to eventually take control of the £265m (€307 million; $399 million)-valued City of London trophy asset, TPG first acquired junior loans secured against the building.
Later, TPG teamed up with senior loan holders, and restructured the asset’s loan book, placing the firm at the forefront in executing the deal in just four months.
And in November, RBS sold an out-of-the-money mezzanine loan worth about £140 million secured against Citi Tower in Canary Wharf to Australian and German equity firm Orchid Capital. It’s likely to be a growing trend, experts say.
“We see an increasing number of real estate investors acquiring junior debt in order to participate in a restructuring, refinancing or as part of a strategy to take ‘control’ of the underlying assets,” explained Nassar Hussain, managing partner at Real Estate firm Brookland Partners told Private Debt Investor. “These structured acquisitions allow such investors to participate discretely and in a less competitive process when compared to an open market sale of the assets on enforcement.”
Buying the debt to effect a loan to own is not a particularly unusual approach, according to Ruth Harris, a real estate finance lawyer at Ashurst. “Where the asset is already in administration or receivership the risk of not being able to initiate an enforcement process is mitigated somewhat, and that asset is real estate. The risk of deterioration in value whilst in a process is also reduced, when compared to a trading business.”
Buying the debt gives an enhanced position as against any other bidders, especially where the debt is bought at a discount. It also gives an enhanced seat at the table vis-à-vis any other bidder; by way of information rights and also by way of duties owed to them by any receiver/administrator, according to Harris. “They can even circumvent a full marketing process if there is sufficient margin between the secured debt and the market value, and thereby speed up the process.”
One New-York based lawyer said: “A lot of these new asset managers, are looking to execute deals like this, just so that they can look credible. They probably don’t have the balance sheets to make substantial investments in the assets they acquire, but the fact they led the acquisition works in their favour.”
Looking ahead, Brookland’s Hussain said: “More debt is coming into the market, and senior lending has come back this year in the real estate debt sector.” He anticipated the increase in activity would provide substantial liquidity, unlocking deals so that more transactions could be completed.
For closer analysis of the Woolgate Exchange deal, read the April issue of Private Debt Investor.