In December 2012, Reed Smith’s Structured Finance Team completed the consensual restructuring of £362,452,000 of outstanding debt owed by the London & Regional Group (the property company of billionaires Ian and Richard Livingstone). As the managing associate on the team that advised London & Regional in various capacities (including Issuer and Borrower), I thought it would be worth touching on some of the innovative structural features, the benefits of this CMBS restructuring and the implications that this has for the CMBS restructuring market as a whole.
This was a highly complex transaction that featured: (i) the consensual restructuring of £234,200,000 of tranched commercial mortgage backed securities issued by London & Regional Debt Securitisation No.1 PLC (Lords 1); (ii) the restructuring of a £128,252,500 contractually subordinated loan; (iii) the compression of a long-dated interest rate swap; (iv) the termination of a liquidity facility; and (v) the implementation of innovative structural enhancements to the London & Regional Group structure that assured the noteholders of the independence of the Issuer whilst maintaining the London & Regional Group ownership of the note issuing vehicle.
Other than the transaction’s undisputed complexity, notable features of the restructuring include the following:
- the adoption of a flexible and pragmatic approach by both London & Regional and the noteholders to put in place an initial standstill in relation to the enforcement of the debt default to allow the commercial parties to focus on the longer-term restructuring;
- the incorporation of various property enhancement initiatives, including allowing the refurbishments of one property as well as a lease extension in relation to another thus allowing London & Regional Group to continue to maximise value on the underlying property portfolio;
- the granting of a step up in the coupon on the notes not only to reflect pricing commensurate with current rates of return but also to permit noteholders to share any potential upside in the value of the property portfolio through the inclusion of a complex PIK element;
- the employment of a restructuring strategy that allowed the disposal of a property at the beginning of the restructuring with disposal proceeds being trapped in the structure, thus incentivising noteholders to complete the restructuring at the earliest opportunity in order sanction the release of these funds to pay principal on the notes; and
- the grant of extensions on its underlying debt obligations to be tied to triggers so as to incentivise London & Regional to de-leverage the structure over the life of the extended debt.
The restructuring can be regarded as hugely successful for both London & Regional and the noteholders as each benefitted from the agreements reached. The incentives offered and pragmatic approach adopted by the parties ensured that this restructuring was completed in an unprecedented short timeframe, with the consent solicitation being launched within two calendar months of the initial engagement of the adviser appointed by an ad-hoc group of noteholders. The property enhancement initiatives coupled with provision for an orderly sale of the properties in the portfolio mean that there is every chance that the underlying property portfolio will not only retain its value but also potentially increase in value, the upside in which the noteholders will share through the payment of PIK. It is for these reasons that this restructuring can be viewed as being highly significant to the CMBS market, as not only is it a template for those single loan CMBS transactions that feature underlying collateral with value ready to be unlocked but it also demonstrates what can be achieved with the inclusion of a considered incentives package.