DEAL IN DEPTH: Lone Star bags French office complex at major discount

US private equity firm Lone Star has taken control of the Coeur Défense office scheme in central Paris for a bargain price

Coeur Défense, the largest office complex in Europe, is being sold by its owners at a discount of nearly 40% to the €2.1 bn it traded for at the peak of the market in July 2007. Lone Star, one of the world’s biggest buyers of delinquent mortgages, is gaining control of Coeur Défense through the purchase of LB Dame SCA, the formal owner of Coeur Défense, according to an information notice from Windermere XII, the issuer of commercial mortgage-backed securities secured by the offices.

The 180,000 m2 office complex in Paris’ financial business district was put up for sale last year through Morgan Stanley as the building’s owners faced a July 2014 deadline to repay over €1.5 bn of debt. The deal, signed on behalf of Lone Star Real Estate Fund III, has yet to be cleared by the French competition authorities.

Court protection
Coeur Défense was acquired in July 2007 by US bank Lehman Brothers, Atemi and GE Pension Fund for €2.1 bn from Unibail-Rodamco and Goldman Sachs Whitehall Funds in a deal financed by a €1.63 bn five-year CMBS. When Lehman Brothers collapsed in September 2008, the special purpose vehicle set up by the borrowers filed for court protection, which effectively granted the owners an additional two years until July 2014 to repay the Windermere XII CMBS vehicle. The landlords - General Electric’s pension fund and the vehicle in charge of liquidating assets on behalf of Lehman Brothers - were forced to close a deal before 10 July 2014 when the massive €1.6 bn of debt backing the scheme is due to expire. Lone Star is believed to be paying €1.3 bn for the asset, in line with the owners’ expectations as well as the asset’s latest appraised value.

The US private equity group is believed to have been picked ahead of a number of other interested parties including Blackstone, Allianz Real Estate and AXA Real Estate Investment Managers thanks to its legacy equity position in the special purpose vehicle which bought the property in 2007. According to a news report by Costar, Bank of America Merrill Lynch is financing Lone Star’s acquisition with a five-year loan of nearly €1 bn.

Coeur Défense, which is currently nearly 25% vacant, was expected to fetch about €1.3 bn through an open sale. The asset was put on the market after special servicer CBRE Loan Servicing reckoned there was little chance of creating more value by postponing the sale, largely owing to the obsolescence of the asset and rising supply at La Défense. In addition, 64% of the asset’s income is being generated by lease terms which will be subject to break clauses or expiries over the next three years. Against this background, in late 2013 CBRELS recommended a sale of the underlying asset ‘without delay’. ‘There is a high risk that the value of the Coeur Défense property may not increase after 10 July 2014, but may remain stable or even decrease after the expiry date of the safeguard plan,’ noted CBRELS.

Discounted payoff
The sale to Lone Star will allow a discounted pay-off of the bondholders, according to a statement from Windermere XII. ‘Discussions have been initiated in order to define the conditions upon which the securitised mortgage loans will be repaid on or before July the 10th, 2014,’ it said. A December 13 simulation of the principal recovery amount
showed that holders of notes from the G, H and I classes are forecast to recover between 9% and 26% of the nominal amount.

Coeur Défense’s deal is the latest in a string of opportunistic acquisitions by Lone Star in Europe. In November 2013, the private equity firm bought a large stake through one of its funds in a Central and Eastern European property developer. Lone Star Fund III acquired 27.75% of the shares in Warsaw-listed Globe Trade Centers (GTC) from the real estate arm of the Kardan group for €160 mln. And in July last year the company joined forces with Wells Fargo to buy Eurohypo’s €5 bn UK loan book in one of the largest transactions in Europe of this kind in recent years. As part of the deal, the Lone Star funds acquired the non-performing assets with Wells Fargo taking over the performing loans.

VIRNA ASARA

A PDF of the full Deal in Depth is available below