EMEA Structured Finance Issue
WBS back, but better: CPUK Finance delivered cheap funding and punchy leverage, using new bond formats to tailor WBS to the needs of private equity. For demonstrating a new way to work operating assets into capital markets funding, and restoring the good name of financial innovation, CPUK Finance’s £1.02bn WBS is IFR’s EMEA Structured Finance Issue of the Year.
To see the full digital edition of the IFR Review of the Year, please click here.
Center Parcs’ CPUK Finance transaction reinvents the wheel, but in the best possible sense of that term. The wheel in question is whole business securitisation, an old technique in the creditor-friendly UK that was largely replaced by CMBS as the pre-crisis bubble inflated.
CPUK Finance took the whole business concept, tweaked the security package, structure, and covenants, and stripped out existing swaps to leave a clean bond-only format that delivered a private equity-friendly deal.
“The key thing about Center Parcs is that it opened this product to private equity houses,” said James Miller, head of secured debt markets, EMEA, at RBS, which was sole structuring adviser, global co-ordinator and arranger.
Private equity has avoided secured bond technology because it has typically been dominated by long-dated, fixed bonds, which are expensive to exit.
Instead of a traditional whole business deal, which might amortise over 10 or 20 years, CPUK Finance spilts the debt into three tranches by time and seniority. It uses structured finance techniques, such as cash traps, turbo amortisation and equity lock-outs, to mimic the shape of vanilla bullet maturities for two A Tranches and a high-yield B Tranche with scheduled maturities of five, 12 and six years respectively.
The long legal final maturity of 30 years, meanwhile, allows for cash sweep repayments that can be used to mitigate refinancing risk.
The security package also afforded the issuer a rating boost (versus an unsecured financing) to investment grade for the A bonds, and tighter spreads in the process.
By managing three different scheduled maturities, CPUK Finance was able to hit distinct investor bases to raise the £1.02bn financing – £300m of five-year A debt, £440m of 12-year A debt, as well as the six-year £280m B debt high-yield component. The deal as a whole delivers 7.6x leverage, with a 7.7% weighted average cost of capital.
Blackstone, equity owner of Center Parcs, wanted to refinance a £1.032bn senior loan covering four existing holiday villages, £750m of which was securitised in the CPUK Mortgage Finance CMBS in July 2007. The loan maturity was originally October 2011, but was pushed to October 2013.
The Center Parcs business consists almost entirely of real estate assets, but these are little use for anything other than a holiday village – villas spread around woodlands, each with large central complexes with swimming pools and leisure activities.
Operating assets like this work perfectly with WBS structures – the properties have limited alternative use, so securing debt on business is more effective than on the properties. But Blackstone wanted a structure permitting an exit route from their equity investment in three to five years. This meant giving investors confidence that a new sponsor would still operate the WBS, and avoiding encumbering Center Parcs with long-term debt.
Blackstone also wanted to fund a new, fifth village. This deal allows it to be added to the ring-fenced structure upon completion in 2014. Construction is funded partly by Blackstone equity and partly through a syndicated loan from Barclays, HSBC, Lloyds and RBS – the four syndicate banks on the bond deal.
Center Parcs is a unique business but the problem the CPUK Finance deal solves is much more common. Plenty of operating assets, some locked up in inappropriate CMBS structures such as those from healthcare groups, need funding.
And structures like CPUK Finance allow private equity groups to come in, take over struggling operating asset businesses, using cheap, but secure leverage to do so.
The deal demonstrates that structured finance skills can find new and constructive applications, providing competitive financing for real economy business. If these techniques gain wider acceptance, the whole corporate sector should benefit.