Six years after crisis, borrower, lender restructures still needed

Source : Real Estate Capital - 06 07 2014

Six years after the financial crisis, the complexity of real estate borrower re-financings plus banks’ balance sheet challenges mean structuring and arranging advisory is still widely needed, say the founders of consultancy First Growth.

Francesca Galante and Cyril de Romance told PIE in an interview that the challenges banks and borrowers are facing mean their services are finding plenty of takers. “This is about sourcing capital and placing capital in good transactions,” says de Romance. “We work for borrowers or for lenders either in new acquisitions or existing transactions. When we work for borrowers it’s capital sourcing across the capital structure - so it can be senior debt, subordinated debt or it can be preferred equity. And when we work for lenders that need help to get access to specific transactions or markets, then it’s capital placement. Just to give you an idea: when we work for borrowers, usually our role is that of an outsourced CFO. When we work for lenders, we are like an outsourced origination and structuring investment team.” Along with Wilson Lee, non-executive chairman since 2010, First Growth offers plenty of experience gained in top-tier financial institutions such as UBS, Lehman Brothers, and Merrill Lynch, private equity funds such as Soros Real Estate Partners, professional investment firms such as ING Clarion, and real estate operators such as Tishman. Between them they have been responsible since the 1990s for investing in equity or providing mezzanine or senior debt in over 100 deals and €30bn of transactions. First working together in 2005 at UBS, the three went independent to start First Growth at the end of 2009.

“We created First Growth because we wanted to be able to go out and raise special situation capital, effectively to have the flexibility to invest in all parts of the capital stack,” says Italian-born Galante. However real estate financings through mid-2010 were still chaotic, and capital raising was tough. “So that’s why in mid-2010, hearing from various investors to create a track record as independents, we rolled up our sleeves and started structuring and arranging for third parties. To date, we have successfully structured and arranged capital injections of €350m, and we’ll probably be up to €500m in the next two months.”

Another key activity is restructuring financings that can be quite complicated from a borrower’s perspective. “Usually these are either syndicated or securitised or half-syndicated and half-securitised, with various lenders involved, so they need a skill set like ours,” says Galante. “It’s like having a CFO that only does debt raising and debt restructuring day-in-day out and we have also done €850m of complex debt restructurings to date.” Another segment of the restructuring advisory covers recurring special servicing for banks, for instance in Germany, that are either winding down portfolios or have gone through a rescue and shifted to a different strategy outside their home markets. “Sometimes their portfolios are fully performing but non-core, but what does that mean?” she says. “Non-core sometimes means they can’t extend, they can’t redeploy capital in a certain region, so for them it’s very helpful to have a team like us because they often don’t have local offices any more.

And even if the book is fully performing, the lack of local knowledge is detrimental in most cases.” Adds Frenchman de Romance: “In very specific jurisdictions like France and Italy, where the rights of creditors can be challenged very easily, these banks have often closed their local office and lack the knowhow, the local network, and the local connections. They can rely on us to be their ears and eyes on the ground, to analyse the situations and update their information and their understanding of each situation - and to restructure the deal with the sponsor if need be. We make sure the bank gets the best solution possible, that its rights are respected, and that such restructuring will not happen again. Thanks to the enhancement of the security package meaning they will be able to enforce properly if needed... We are like a one-stop- shop in continental European real estate debt.”

In Germany, banks still have plenty of work to do, the First Growth executives say. Still dealing with the financial crisis fallout, many continue to work through a shift in strategy, in many cases exiting markets where they have been active for years. Says Galante: “In Germany we see a lot of lenders who have been trying to exit some markets and have little stock left there. We’re ideally suited to help them transition away and effectively decrease their loan books. We have a lot of German clients in this category.” In addition, adds de Romance, the firm works for borrowers in transactions that need re-financing in difficult situations - where there is a need to finance or refinance secondary office assets or portfolios in secondary cities, for example.

“Typically , we might work for borrowers on the restructuring side, or it could be asset managers who are not necessarily the owner who are distracted or do not have enough human resources to deal with these time-consuming situations. "ey are also happy to get fresh eyes on the transactions and have people who can come up with a degree of creativity and would know what to do - and who also know if the time has come to involve other professionals or advisors such as lawyers or administrators, and among these know who the right people are. Plus they need people like us who know how to deal with banks in a non- aggressive way. Because we really believe in the consensual restructuring, where the interest of both parties are preserved.” “We have the experience of going up and down the capital stack,” says Galante, “because in continental Europe you can’t get too aggressive.” In many EU countries, markets are not as transparent as in Germany, the UK or the US. “So you need an element of consensuality from the borrower; that’s the approach we like to take. Foreclosure procedures are very different in continental Europe than in the UK and the US.”