Lone Star’s swoop puts end to Windermere XII/Coeur Defense saga

Source : Capital Structure - 15 03 2014

Lone Star formally paid today EUR 1.3bn to Windermere XII FCT, which will allow for the full payment of the Class A and B notes. Noteholders will receive their payment on the 10 April IPD.

The sale of the Coeur Defense property, located near Paris and which forms the collateral of this CMBS transaction, puts an end to a long-drawn-out legal battle over the asset, which tested France's legal framework for asset finance as well as its Safeguard procedure.

In the end, Lone Star resorted to very basic techniques to take over the asset: acquiring the equity of a holding company (LB Dame) and buying out in the secondary market all the junior classes of notes.

Gilles Saint Marc, partner at Gide Loyrette Nouel and counsel of Windermere XII, said that the outcome is very positive for the transaction, the Paris real estate market and more generally Paris as a financial centre. "We do not know what might have happened after 10 July; the property may have had to be sold through a judicial liquidation and at a low valuation which would have been damaging for the real estate market of the Paris area," he said.

He added: “Whether the decision to open Safeguard back in 2008 was the right course of action is now old history. What matters is that a consensual solution for the asset has been found permitting an exit of the transaction at the satisfaction of all parties.”

Laurent Assaya, a restructuring specialist at Jones Day, noted that the “Windermere XII transaction kept going for economic reasons rather than legal reasons: thanks to the low interest environments, coupon payments remained below the rents received. But the market has also moved on and has gained in professionalism. Ultimately, Coeur Defense and Windermere XII will be exiting Safeguard thanks to a consensual sale. This is positive for Paris and I'm confident we'll see more lenders' led restructuring in the coming months and years”.

On 7 March an affiliate of Lone Star Real Estate Funds III acquired the entire share capital of LB Dame & Partners, the parent company of Dame, which is itself the parent of HoLD, the owner and manager of the Coeur Defense property. LB Dame was owned by Lehman Brothers funds and a pension fund of General Electric. An affiliate of Lone Star Real Estate Funds III also purchased in the secondary market all the notes and residual units apart from the majority of the Class A notes and a minority stake of the Class B notes.

The successful outcome comes ahead of 10 July, when the borrower was supposed to repay the loan balance. The Safeguard plan for the holding companies was also supposed to end on 20 July 2014. "No one knows what would have happened if the asset had not been sold by the end of the Safeguard plan,” said Francesca Galante at real estate advisory boutique First Growth. “Would it have been a liquidation or a Safeguard plan extension?”

She said: "This case highlights the competitive advantage that real estate investors who understand financial engineering and structuring have over those who take the narrower, pure property approach.” Ms Galante pointed out that "while advisors were preparing for the asset sale and institutional investors waited for it to be placed on the market, Lone Star had a competitive advantage on everyone by approaching the various creditors in the capital stack to gain control of Coeur Defense through its debt."

According to Mr Saint Marc, the extension of the Safeguard beyond July may not have been an option given the legal requirements which should have been met and the lack of prospects for a recovery of the real estate market in the foreseeable future.

The original transaction was financed by two bullet loans (a B1 loan of EUR 1.297bn and a B2 loan of EUR 341.6m). As of January the outstanding amount was EUR 1.638bn. As for the notes, EUR 776m of Class A notes was outstanding, EUR 317.4m of Class B notes, EUR 126.6m of Class C notes, EUR 39.2m of Class D notes, EUR 80.8m of Class E notes, EUR 81.3m of Class F notes, EUR 38.7m of Class G notes and EUR 59m of Class H notes.

Morgan Stanley and Rothschild had been working on sale documents on behalf of the servicer, CBRE Loan Servicing, but Lone Star's swoop made the sale process collapse. Lone Star's purchase is structured as a discounted pay-off, financed by BAML; part of it is said to have already been refinanced by AXA Real Estate.

The Coeur Defence saga started soon after the collapse of Lehman Brothers in September 2008. The bank was the hedging counterparty in the transaction and had to maintain a minimum credit rating throughout the life of the term loan. The difficulty (or impossibility) to find a new swap provider caused an event of default under the term loan, prompting HoLD and Dame to apply to the Paris Tribunal of Commerce for Safeguard protection.

Gide argued that it made no sense for an SPV, with no real economic activity, without assets other than the property being financed and without liabilities other than the financing which enabled that asset to be acquired, to be placed under Safeguard. In the opposing camp, Gibson Dunn, which advised HoLD and Dame Luxembourg in Paris, successfully contended that any debtor confronted with difficulties is eligible, regardless of their nature and regardless of whether the debtor is an operational or a holding company or a special purpose vehicle.

An initial ruling by the Paris appeals court restricted the opening of Safeguard to only entities facing operational difficulties; that is, stemming from their principal activity – therefore potentially excluding BidCos and HoldCos from Safeguard protection. This decision was however quashed by the French Supreme Court (Cour de Cassation) in March 2011, which referred the case to the Versailles appeals court.

In February 2013 the Versailles Court of Appeals confirmed that HoLD and Dame Luxembourg, could benefit from Safeguard plans. It also clarified two key aspects of the Safeguard regime. The first is that contractual provisions of the term loan (such as events of defaults, acceleration of the loan, LTV covenants etc) are suspended while the Safeguard plan is in force. During this time, the lenders are only entitled to receive amounts provided under such plan. "This is the first time this principle has been expressed by French courts in such a clear-cut manner," said Gibson Dunn lawyers.

The second was the recognition of the enforceability of future receivables (rents in the case of a CMBS) via the Dailly assignment mechanism. "This means that creditors are entitled to access the cash flows generated by the underlying financed asset, irrespective of the opening of a Safeguard procedure by their debtor, and to apply the cash flows against the payments due and payable to them by the debtor in Safeguard", said Gide lawyers.

During the legal dispute, lawyers and structurers have had to find alternative routes as the case left creditors open to the threat of borrowers claiming centre of main interest (COMI) in France, enabling French courts to assume jurisdiction and approve Safeguard protection when they run into trouble. They have chiefly relied on Double LuxCo structures – that is, setting up two Luxembourg HoldCos, meant to insulate the company from the French courts if it ever gets into difficulty. The new structure remains however untested in a restructuring scenario.