DEALTALK-Administrators struggle with big bond blow ups

Wed Jul 22, 2009 4:22pm BST

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* Bond administrators given power to restructure bust CMBS

* Little clarity about servicers' responsibilities

* Some step in, eye lucrative fees

By Tom Freke

LONDON, July 22 (Reuters) - The fate of billions of pounds of British commercial property is in the hands of a small group of secretive administrators, leaving investors in the dark about the future returns on their bonds.

These companies, known as "special servicers" in the jargon-filled world of securitisation, have been thrust into the spotlight after sharp falls in the value of the commercial property used as collateral against the bonds.

The servicers -- small groups of real estate specialists, lawyers and debt experts -- were never expected to cope with a meltdown of the credit markets and a near-shutdown in the securitisation industry, experts say.

"The documentation ... is there to deal with small issues within the securitisation, not the whole thing imploding," said one special servicer, asking not to be named.

"Nobody ever thought we would be where we are today but we have to use the documentation we have," he added.

Investors hold about 77 billion euros ($109.3 billion) in commercial mortgage-backed securities (CMBS) in Britain, data from Barclays Capital show -- but servicers now struggle with the overly complex nature of the paper.

Such bonds are backed by big office buildings, hotels and shopping centres across the UK, assets which have lost 40 to 50 percent of their value over the last two years.

DEALS DRAG

Restructuring the bonds is often difficult because there are many lenders invested across many tranches, making servicers cautious, particularly as there is little case law around the language used in CMBS documentation.

"What some servicers may not have envisaged is the complications dealing with so many stakeholders across the capital structure," said Steven Ong of law firm Weil Gotshal.

"One of the debates is whether the special servicer should take care of the senior lender, who may want a quick sale, or someone further down the debt structure," Ong said.

The high-profile restructuring of Four Seasons Healthcare -- which owes bondholders more than 1 billion pounds ($1.64 billion) -- is a case in point.

A deal has dragged on for over a year because of difficulties finding agreement amongst 30 lenders across 11 debt tranches [ID:nLD720606].

More bonds will enter special servicing because of tenant defaults and upcoming loan maturities, rating agencies warn, with swathes of CMBS -- particularly amongst low-rated UK property-backed bonds -- being downgraded.

Looming loan maturities will boost the flow of CMBS deals requiring the attention of the special servicers.

"A further eight large UK CMBS loans are scheduled to mature between now and the end of the year," said Fitch's Gioia Dominedo and the number will rise to about 30 in 2010.

OPPORTUNITY FOR SOME

Stepping in where others are overburdened, real estate broker CB Richard Ellis (CBG.N) has set up a special servicing arm, which was recently appointed to deal with a portfolio of trophy property assets owned by billionaire Simon Halabi.

It now wields the power to decide how to restructure the 1.4 billion pounds ($2.30 billion) of debts backing the portfolio, or sell the properties, which include Aviva's City of London headquarters building [ID:nLG243850].

Such mandates also offer lucrative fees up to 1 percent of the value of the bonds that may amount to tens of millions of pounds from a single transaction.

CBRE won the mandate after bondholders replaced Hatfield Philips, one of the sector's largest players.

Hatfield Philips, based on the 34th floor of Citi's Canary Wharf skyscraper in London, is special servicer on almost 5 billion pounds of UK CMBS debt, according to Fitch Ratings.

CBRE and Hatfield Philips both declined to comment on the role of the special servicer.

(Editing by Sitaraman Shankar)