Presentation on theme: "Opco/Propco and all that October 2008"— Presentation transcript:
1 Opco/Propco and all that October 2008 Presentation made to RBS real estate group on 29 May Document BK: Second in a series. First presentation can be found on BKOpco/Propco and all that October 2008
2 Today’s session Opco/Propco structure Lease default Themes Opco/Propco scenarioConclusionsThis session will focus on some issues that can arise when a real estate loan that is supported by an underlying business comes under stress. Think pubs, hotels, care homes, motorway service stations, car dealerships, hospitals etc. A classic example of the sort of deal we will be talking about is the opco/propco, but many of the points we will touch on are equally relevant to loans that have been made direct to property rich opcos e.g. hotel companies. Whatever the deal structure, the common component is the reliance that the real estate lender has on a single operating business in order to maintain the value of the real estate.This session builds on some of the themes that we covered in the last talk we gave. That session focussed on the dynamics of the arrangements between the financiers – refresher quiz.We’ll start with the briefest of summaries of some relevant laws - UK insolvency laws and the laws relating to the termination of UK leases - and then move on to some general themes before playing out a possible scenario.So, with no more ado…
3 Opco/Propco Structure SponsorsOpco and Propco in same groupCommon directorsPropco is an SPVOpco is a trading companySale and lease backSeparate financingsSeparate securityCommon lenders?ParentHoldcoHoldcoSale of PropertiesPropcoOpcoPurchase PriceRentLeaseSecuritySecurityLoanLoanPropco LendersOpco Lenders
4 Linkage between Propco and Opco The leaseIndividual or master leaseLease guarantee from Opco Holdco or Parent?Option to buy Opco assets?Common directorsIntra-group subordinated loanCosts and expenses indemnityCorporate and tax group:SDLT and CGT degrouping chargesTax deed?
5 Lease default Main remedies are to sue for unpaid rent or to forfeit Forfeiture is a bit of a blunt weapon:Ends the future rent stream - no entitlement to accelerate future rentProbably need court to order possessionTenant, subtenants and their mortgagees can apply to court for “relief” from forfeitureTiming uncertainForfeiture may end subleasesMost relevant remedies are likely to be litigation and forfeiture.Neither is a particularly subtle remedy in itself. Both lead to Armageddon outcomes if seen through to the end. But, they are what gives the landlord a negotiating position and, in most cases, these will be negotiated outcomes.Interaction between insolvency laws (particularly administration) and law of forfeiture.
6 Themes Number of parties Fragmentation of investor base Internal conflict within banksWho’s in control?Rise of special servicingKeeping the lights onKeeping the lights on:Trading obligations – motorway service stationsHotel management contractsTakeover costs may include:statutory compliance – premises upgrade, lose grandfatheringtaking responsibility for capex and other investment obligationsImpact of borrower’s insolvency: head leases, hotel management contractsThird party creditors: tax man. Pressure of threatened litigation.Contingent tax liabilities: s179, SDLT clawback, shareholder loans and CGT groups
7 Who’s in control? Whoever can sanction workouts and enforcement Intercreditor and servicing arrangementsDistinguish between:“UK Model”: Senior and junior lenders have independent rights set out in the intercreditor agreement“US Model”: Whole loan servicing – special servicer has discretion to work out and enforce
8 UK Model Junior lender rights: Cure rightsRight to buy-out the senior debt at parVeto against changes to fundamental loan termsRight to enforce:Standstill periodSecurity cover testUK Model relies on secured creditor consensus for pre-enforcement workout
9 US Model Servicing and special servicing Servicer’s authority is regulated by:Obligation to comply with the Servicing StandardConsultation and approval rights of the Controlling Party(Possibly) veto rights in favour of other creditorsControlling Party will be the most junior class of lenders, subject to a control valuation testJunior lenders will have cure and purchase rightsServicer may have purchase right at par or fair valueUS Model capable of binding all secured creditors to a common pre-enforcement solution
10 Keeping the lights on Impact on realisable value Takeover costs Ownership of trading assetsEmployeesImpact on regulatory and trading licencesImpact on material contractsImpact on ownership rights
12 Opco Lenders: opening position Opco is (or will soon be) insolventPart of the business viable as a going concernWant to structure a sale to leave the buyer of the viable part with a clean positionBuyer may be Sponsors and/or Opco LendersDo Opco Lenders care if Propco is left in the lurch?Can Propco frustrate or control the terms of a sale?Buyer may be a true third party or, just as likely, a newco formed by the Opco group and funded by the Opco lenders.
13 Opco: opening position Little choice but to allow Opco Lenders (or an administrator) to lead the negotiationDirectors:Likely to be conflictedNervous about their personal position – risk of wrongful trading?Is there enough in the deal for Opco Lenders to be interested?
14 Propco Lenders: opening position Propco loan in (or about to) defaultAdverse market conditionsPropco is (or will soon be) insolventDesire (need) to keep the lights onShould Propco fund Opco in the interim?No security or control over Opco trading assetsLinkage with Opco is principally through the leaseDon’t want to be left with the rump of the Opco businessPropco loan in default – rent not paid, LTV default.Security or control over Opco trading assets – call options? Security unlikely?In which case, it’s down to the lease etc
15 Propco: opening position Little choice but to allow Propco Lenders to lead the negotiationDirectors:Likely to be conflictedNervous about their personal position – risk of wrongful trading?How does Propco get a seat at the negotiating table? Has no direct contact with Opco. Do Propco lenders need to enforce?Propco directors – come back to this.
16 Sponsors: opening position May be out of the game, but…
17 The action hots up Opco goes into administration Moratorium on forfeiture of the leaseOpco administrators identify the viable part of the Opco businessAsset sale likely to be preferred to share saleBuyer will “cherry-pick” the Opco portfolioOpco likely to default on the remainder of the portfolioPropco forced to provide relief to Opco administratorsMoratorium: timing and outcome uncertainty.Asset sale v. share sale. Who is the buyer?Cherry picking.Odds are favouring Opco at this stage.Just at this moment, it’s not looking good for Propco. But it’s too early to fold. Propco and Propco lenders have the most at stake and there is more play to come.
18 Propco’s hand Can Propco frustrate a sale? Does the sale require landlord consent:Prohibition on assignment?Renegotiation of rent and/or other lease terms?Can Propco forfeit all or only the defaulted leases?Are the leases cross-defaulted?Single lease v. individual leases?Opco Holdco or Parent lease guarantee?Will the sale trigger contingent tax claims?Propco fights back…The lease is likely to provide most of Propco’s weaponry. Asset sale may require Propco consent for assignment and other changes sought by buyer:Absolute prohibition?Qualified consent?Is it reasonable to withhold consent if there are rent arrears?Is it reasonable to withhold consent if tenant is insolvent?Parent company guarantees and tax guarantees may also generate significant pressure on the Opco.
19 Some conclusionsAt the end of the day, the debt/equity ratio and rent will need to be resetOpco administrators control the Opco businessPropco has most to lose but its hand is forced by an Opco insolvencyPropco may have a blunt weapon in forfeitureIf Opco has found the best deal going, why would Propco frustrate a sale?Endless variety of paths and outcomesIt’s a lot easier when you don’t have much to loseIt’s a lot harder when you have most to lose
20 Speakers Ian Field Arthur Dyson Ian Field, Partner Banking – Restructuring Telephone:Arthur DysonArthur Dyson, Partner Banking – Global Loans Telephone:
21 Opco/Propco and all that These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.
22 New York CLEIn order to comply with regulations for New York CLE, delegates must note the following code to claim hours under this jurisdiction if viewing this seminar by Video-Conference or DVD:LCET