Cairn Capital recently teamed up with fellow UK fund manager Schroders and German bank Eurohypo to launch a £250m (€297m) property debt venture in the UK property market.
Peter Hansell, who heads Cairn’s property group, says: “Real estate debt is a natural progression for us. Until now, we have not been confident that the returns were there because of the huge pricing gap between the parties involved.”
Hansell joined Cairn Capital in 2008 to develop its property platform. He was formerly a managing director at Lehman Brothers, in charge of the European real estate team looking after credit, structuring and distribution of property-secured debt products.
His other roles include running Standard & Poor’s European commercial mortgage-backed securities rating team, originating commercial mortgage loans for the Royal Bank of Scotland and practising as a valuer with Weatherall Green & Smith.
The new debt venture at Cairn will have an exclusivity arrangement with Eurohypo to provide additional junior debt for its senior lending platform.
In all, the fund will provide additional debt that will cover £1.5bn of property investment. As David Henriques, who is Cairn’s director and a member of the executive management committee, points out, it is relatively easy for banks such as Eurohypo to lend up to a certain amount of a property’s value – usually up to 60% – owing to the low cost of using the German covered bond market plus its depth and reliability.
The cost of additional debt
But the additional debt that is typically required by property investors of up to 75% of a property’s value costs more. The new vehicle will aim to fill that gap – now regarded as the more junior elements of a loan – but which had been seen as the upper end of the senior element before the credit crisis.
“The tranche between 55% and 75% is also higher yielding, with margins of as much as 500 basis points over the interbank lending rate. When blended with the lower-cost senior debt, borrowers could typically see an overall borrowing rate of about 300 basis points over Libor.
William Hill, head of property at Schroders, says: “Eurohypo has teamed up with a group that can provide the junior debt that will help them lend to the market, while the returns on offer are attractive to our investors.”
The fund is targeting returns of about 7%, a figure that is seen as relatively low risk, given that the equity layer above the debt that would be affected should values fall again.
Founded in 2004
Cairn was established at the end of 2004 as a debt specialist covering debt, corporate credit, asset-backed securities and real estate. As at 31 December 2010 it had around $32bn of assets under management.
Henriques explains: “We have a very institutional client base investing in a combination of discrete funds and long-term management mandates. The real estate platform is split between asset management and advisory businesses.”
An important situation that Cairn advised on was REC IV in the UK, involving the £1.5bn Hercules Unit Trust undertaking a restructure in 2009 of its £1bn securitised debt facility to facilitate the steady reduction of debt over the remaining term and the ultimate refinance of the facility at loan maturity. The fund is managed by British Land and Schroders.
“It was the first consensual commercial mortgage-backed securities bondholder restructuring,” says Henriques.
Subsequently, the firm acted on the borrower side for Fleet Street Finance 2, which involved restructuring the €1.1bn securitised senior tranche of a total €3.5bn of debt. The restructuring was the first to secure an extension of the maturity dates of both the underlying loan and the overlying bonds.
Cairn also worked on one of Europe’s largest and most complex debt restructurings, that of German residential firm GSW’s €890m (£741.2m) liability.
GSW, which is owned by funds that are managed by Goldman Sachs and Cerberus, appointed Cairn Capital in July last year to advise it on refinancing or restructuring its debt. This was due to mature in July this year, but with two one-year extensions taking final maturity to July 2013.
The deal was complex in that the €890m was split between two securitised debt vehicles, managed by two different servicers, Capita and Hatfield Philips, with two separate sets of securitised bondholders. The servicers agreed to work together in the best interests of bondholders, the first time such an agreement had been reached in Europe.
Appointed by Eurohypo
Earlier this year, Eurohypo appointed Cairn as its financial advisor in respect of an €800m loan secured against a portfolio of 218 properties, owned by Dutch property company UniInvest, which is valued at €905m.
Eurohypo is the special servicer to a €661m loan it provided and then securitised in a transaction known as Opera Uni-Invest. Separately, Eurohypo is also facility agent for a €139m junior loan also secured against the properties.
Cairn is advising the special servicer on all aspects of its role in the transaction. The loan breached a standstill agreement in February this year.
As financial adviser to the special servicer, Cairn Capital needs to consider all potential future options around the position. Investors that bought the bonds secured against the property will be required to approve any extension of the loan, which will also require the deferral of the maturity of the bonds secured against the loan.
For the future, Henriques says that Cairn and Eurohypo see the debt fund as the first venture within a longer-term relationship.
