Deutsche Annington’s GRAND deal being watched carefully by CMBS borrowers

It has been a long time in negotiation, and there are still several hurdles to surmount, but Europe’s largest-ever residential refinancing looked to be on track this month after Germany’s largest landlord Deutsche Annington signed a preliminary agreement to restructure its main multi-billion GRAND securitisation vehicle.

Deutsche Annington, headquartered in Bochum, owns and manages more than 210,000 apartments, a result of various acquisitions between 2001 and 2005 which saw it acquire huge residential holdings from, firstly, the German railway Deutsche Bahn and then the utility E.ON under its new ownership of UK private equity group Terra Firma. Of its holdings, 180,000 apartments are owned outright, while about 30,000 are managed throughout the country on behalf of third parties.

At the time (2005) the E.ON portolio was valued at €7bn, which was financed by a €5.8bn securitisation, of which €4.3bn is now being restructured.

The agreement reached earlier this month will allow Annington to restructure this €4.3bn of debt by giving it more time to repay holders of its commercial mortgage-backed securities, known as German Residential Asset Note Distributor plc, or GRAND. This would bring GRAND’s loan-to-value below the 60% threshold and reduce its outstanding debt to €3.8bn.

The agreement, reached after more than a year of talks, was accepted by creditors that hold 32% of the debt, and now needs approval from the other investors in a group totalling more than 100 note-holders.  Among those agreeing to the deal were JP Morgan Chase, Pacific Investment Management Co (PIMCO), BayernLB, ING Investment Management, LBBW and Standard Life Investments Ltd.

The restructuring should clear the way for Deutsche Annington to sell shares to the public, CEO Wijnand Donkers said, adding that he expected the refinancing to be completed in the fourth quarter. A court hearing is scheduled for later this year, which will require a quorum of 75% of Annington bondholders to ratify the proposed refinancing.

Specifically, the new agreement will see owner Terra Firma injecting €504m of capital into Annington’s newly-incorporated German entity. Of the debt outstanding, Annington would be given a total of five years to  pay down the loan. €1 billion euros would be due in the first year, €700 million in the second year, then €650 million in the third and fourth years and the rest in the fifth year. The added cash will reduce the loan-to-value ratio to 59.7% from 71.7%, according to documents published by the company, while the margin on the GRAND notes will be increased from 48 bps to 165 bps.

A specific clause would require the company to repay €1.7bn of the loan - in any event - before listing its stock publicly – and thus providing some form of partial exit for Terra Firma.

CEO Donkers said that the company is now in talks with German banks to finance the €1bn due in the first year, which it is likely to raise in smaller portions, given the withdrawal of so many traditional lenders from large-scale property lending.

If the refinancing does go according to plan, it will make a sizeable dent in the more than €10bn of German multi-family loans or CMBS due to mature in 2013 alone. It is, naturally, being watched carefully by countless other multi-family borrowers who are also looking to find a way to imminently re-finance many billions of euros worth of debt.