Most legacy opco-propco real estate structures are unlikely to secure refinancing in their current form from either banks or capital markets, according to a new report.
Bishopsfield Capital Partners, the structured finance advisory firm, says whole business securitisations and credit tenant leases present alternative refinancing options, particularly for OpCo-PropCos with specialised and illiquid property assets.
It also advises that vehicles containing high-quality and more liquid real estate – high street retail and offices – should seek outright asset sales where possible.
The report, OpCo-PropCo: a redundant technique or here to stay?, said the challenge facing opco-propcos is exacerbated by €50bn of CMBS transactions requiring refinancing between 2012-14, reduced bank balance sheets, weak valuations and funding gaps within legacy vehicles.
Bishopsfield partner and co-author of the report, Arjan van Bussel, said: “Funding gaps will require stakeholders in OpCo-PropCo structures to suffer pain. The question of how much will be a function of the market capacity under different market structures, such as outright property sale, WBS or CTL.
“The post-crisis bank market is not deep enough to refinance large loans and the syndication market has also been adversely affected by the credit crisis,” said Mr van Bussel.
The rationale for opco-propco remains valid despite high-profile failures, including this year’s collapse of Southern Cross Healthcare, according to the report.
Financing terms, such as leases with rising rents that prove unsustainable in business downturns, are seen as responsible rather than the structure itself.
Preserving the sound financial health of the opco is paramount and certain structural features, such as retention of an element of property sale proceeds in the opco or performance-based transfer of properties to the propco, could support this objective.
“In the absence of a vibrant CMBS and B-note investor base, we believe borrowers will have to look at alternative investor sources with different risk profiles. Replacement of legacy OpCo-PropCo structures with a new instrument is less a function of the underlying model than a consequence of factors affecting the European property financing market and global economy,” said Amir Khan, co-author of the report.
Bridget.oconnell@estatesgazette.com
