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Public Debt Shows Borrowers Making Payments To Steady Troubled Loans

A series of securitised loans have shone a light on the kind of action borrowers are having to take to stabilise their debt in the wake of the coronavirus outbreak.

In three recent CMBS transactions, borrowers have made top-up payments (payments beyond the normal schedule) to secure covenant waivers and avoid breaches of loans where income has been hit. The loans are all secured against UK hotel and retail properties, which have been particularly badly hit because of the lockdowns enforced to control the pandemic. 

Hotels operated by Holiday Inn are part of portfolios requiring loan restructuring.

CMBS transactions provide an insight into the kinds of actions borrowers are likely having to take across the real estate investment landscape. Because the bonds are publicly traded, loan modifications and restructuring have to be publicly disclosed. 

In June, Thai investor DTGO made a £17.5M payment to avoid breaching loan covenants on a £271M loan used to fund the £465M purchase of a portfolio of 17 hotels across the UK from hedge fund Marathon Asset Management. The deal was only completed in December, and Goldman Sachs provided and securitised the senior loan in late February. There is also £65M of mezzanine debt secured against the portfolio.

In a notice to bondholders that bought the debt, loan servicer CBRE said that as a result of the lockdown, all of the properties had to close, meaning income dropped to zero. All of the covenants on both the loans have been waived until the loans mature in December 2021, in exchange for the top-up payment. CBRE said that without the waivers, the borrower said the portfolio would likely go into insolvency. 

As well as the initial £17.5M, DTGO will make payments each month to ensure there is no shortfall on payments required on the loans. 

The hotels in the portfolio are operated under franchise agreements by IHG, Hilton and Marriott. At the end of last year, the average occupancy rate was 83%. 

Meadowhall shopping centre

A second hotel CMBS transaction arranged by Goldman has also seen the borrower make a top-up payment. In 2018 a company of Israel’s Dayan family paid Apollo £742M for a portfolio of 20 UK hotels operated under the Holiday Inn brand. The transaction was funded by a £450M senior loan that was provided by Goldman and then securitised, and a £70M mezzanine loan.

The Dayan-backed company yesterday made a £28M payment in exchange for a series of loan covenant waivers, according to CBRE, which is also the servicer to this loan. Any breaches of loan-to-value, interest-cover, debt-yield and net-operating-income covenants will be waived between now and July 2021. Again, the borrower has to ensure there are no payment shortfalls on the loan. 

In the retail world, British Land and Norges Bank Investment Management made a £4.3M payment in June to ensure there was no debt-service payment shortfall on a £577M loan secured against the Meadowhall shopping centre in Sheffield. The centre is valued at more than £1.1B. 

Last week bondholders agreed to a series of waivers that mean the loan secured against the centre will not go into default as a result of the income from the centre falling, which is due to the enforced closure of most of the 131 stores. At the April interest payment date, the centre produced £12M of income, compared to the normal quarterly figure of £20M.