Why CBRE pulled the plug on Gemini

It was the most anticipated administration of the downturn.

A portfolio of regional secondary assets that had a value of more than £1.2bn during the boom, but as the credit crunch took hold, the portfolio saw its value rapidly slip until this year it reached £440m – less than half the value of its £950m debt pile.

But for the investors that took on some £950m of the portfolio’s debt, £440m sounds a lot better than the amount that is expected to be realised from the forthcoming administration.

According to debt servicer CBRE, the best-case scenario is that debtors will recoup £277m. The worst case? Just £70.3m.

So why, after more than four years in special servicing and with a workout proposal on the table for discussion at a 5 September investor meeting, did CBRE choose to call in administrators at Deloitte now?

“CBRE had persevered with the restructuring option for as long as it thought it had legs,” said a source close to the process, “but it got to the stage where it could see that it was not viable, so took the necessary steps.”

Gemini – a highly leveraged portfolio of 34 secondary assets – became unviable after an “overwhelming majority” of class-A noteholders failed to offer their support to a proposal from owner Glenn Maud’s Propinvest and its adviser Lazard.

The lack of support means the proposal, which would have seen the loan secured against the portfolio sold to a consortium including private equity firms KKR and Westbrook Partners, will never get to be presented to bondholders at the 5 September meeting. Instead, on 21 August, the Royal Court of Guernsey will officially rubber-stamp the administration of Gemini.

But the lack of support for a rescue wasn’t the only factor influencing CBRE’s decision. The firm also secured a crucial agreement with Barclays over a crippling interest rate swap.

CBRE had been reluctant to accelerate demands for repayment of the loan, which matures in 2016, despite being in default, because to do so would crystallise a £280m penalty for the early exit of the 20-year interest rate swap.

The hefty liability – which was as low as £40m when CBRE started servicing the loan – would have to be paid before the lenders were repaid, further eating into the already depleted amount they could expect to recoup from their investment.

Under the new agreement, the swap will be paid down over an agreed – but not publicly disclosed – period as assets are sold.

Analyst Nomura said the swap deal should “improve CBRE’s flexibility to spend on asset management initiatives, rather than sweeping all of it to pay off the swap [break costs]”. It would also allow noteholders to benefit in the unlikely event of interest rates rising, which would reduce the break costs.

The final straw for CBRE’s decision to call time on the portfolio was a looming winding-up order from HM Revenue & Customs for £15m in unpaid VAT.

The VAT bill dates back to 2008, when money collected from tenants was allegedly deposited into a general account rather than a segregated account related to the securitisation.

CBRE says it was then used to “discharge liabilities” of another company in Propinvest’s labyrinthine corporate structure, the Guernsey -registered Propinvest Group, which was put into administration last year.

Propinvest sees CBRE’s motivation for the administration order differently. It reacted with “surprise and disappointment” particularly, it said, because CBRE’s decision was taken “before bondholders had been given the chance to consider the very credible alternatives”.

Propinvest claimed this “resulted in the irretrievable loss of the £80m of value that KKR/Westbrook placed on the maintenance of the existing corporate structure and the preservation of the swap”.

CBRE’s agreement with Barclays also raised the ire of Propinvest, which claimed it was “not necessary as CBRE is well aware that HMRC had no immediate intention of enforcing any repayment as it hasn’t done since 2008”, and will entitle Barclays to be paid a £280m swap termination fee “before bondholders receive anything”.

It also pointed out that, under the agreement, CBRE will continue to receive “its substantial special servicing fee, other professional fees and a further fee on the liquidation of the assets”, and that HMRC was “merely an unsecured creditor ranking way behind the secure creditors”.

So where to from here? CBRE, which receives net loan-servicing fees of £1.2m pa, plans to sell a small number of poor-performing assets in the short term, and then concentrate on asset managing the rest of the portfolio in line with a four- to five-year workout.

For Propinvest, the impending administration spells the end of any hope of a workout with backing from KKR and Westbrook, and sees another branch of its once-sprawling property empire crumble.