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LandSecs’ £1.5bn debt refinance talks underway
Thursday, October 13 2011 | 09:56 AM
|Land Securities, the UK’s largest property company, has begun talks with banks to refinance its £1.5bn revolving credit facility by the end of the financial year, as part of a strategy to materially pare back it total debt facilities, CoStar News understands.
The real estate investment trust (REIT) has two overall pools of debt: a £1.5bn revolving debt facility, which was written at sub 30 basis points over LIBOR in August 2006 and expires on 29 July 2013, and five separate bilateral revolving facilities ranging in size between £50m and £250m, with staggered maturities between April and November 2014.
Revolving debt facilities allow borrowers to change the underlying properties, against which they lend, providing much-need flexibility for opportunistic off-market transactions.
Land Securities is planning a material reduction in its overall total £2.25bn debt facilities, with negotiations already underway between the REIT and existing banks – which include a broad mix of the UK clearing banks and overseas banks.
Negotiations between the REIT and the banks – and the margins which are agreed for the replacement principal revolving facility – will be priced on corporate terms, as opposed to asset-level pricing, and will largely be determined by the ancillary pipeline which Land Securities has to offer its relationship banks.
Banks are usually willing to offer preferential terms to the larger property companies in expectation of lucrative ancillary business – such as interest rate and currency swaps, corporate bond agency mandates, money transmission, advisory services and foreign exchange – all of which which makes up for the reduced profit from headline margins on the secured loans themselves.
This explains the gulf in pricing that the big REITs and quoted companies can achieve – base property loan margins on UK property, on asset level pricing, are now as high as 250 bps over LIBOR against UK property, while some commentators believe Land Securities could achieve less than half that margin.
Another key to negotiations is likely to be Land Securities’ own three to five year plans.
Immediately post Lehman’s collapse, the writing was on the wall that banks’ costs of capital would rise and available lending would shrink so Land Securities have had in mind for three years now that a £1.5bn facility could not directly be replaced, analysts argued.
As a consequence of all these issues, most bankers expect Land Securities to choose fewer rather than more banks, which are willing and able to commit larger pools of their balance sheet.
Revolving debt facilities tend to include staggered margin uplifts after agreed thresholds are passed – known as utilisation fees – where those thresholds are, and what the subsequent margin uplifts will be agreed will be central to negotiations – suffice to say, lower thresholds and higher uplifts are expected.
Utilisation fees naturally encourage property companies to remain reasonably leveraged.
Unlikely participants on the new ticket would be the pfandbrief-funded banks because pfandbrief funding lines require fixed, not alternating, collateral. The extent to which such banks ever do appear on revolving debt facilities is through the use of their direct balance sheet, for which funding costs are higher.
“The Germans don’t like revolvers,” as one banker put it.
In July, British Land issued an oversubscribed dollar-denominated $480m US private placement, implicit in which would be incurred cross currency swaps to price the capital back to £300m in sterling, the total liabilities of which will be dependent upon the duration of the swaps and market movements over the period. British Land’s decision to tap into the US private placement market helped it achieve 146 basis points over LIBOR.
In February, Grosvenor issued a sterling-denominated £125m, with debt investors, rather than Grosvenor, taking on the swap risk with banks.
Land Securities declined to comment.
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