Stakeholders in opco-propco structures will be hard put to meet the looming refinancing challenge, according to a report published by financial adviser Bishopsfield Capital Partners. The majority of opco-propco real estate structures - whereby a property company is split between an operating division (the opco) and a unit for its real estate (propco) - are unlikely to secure refinancing in their current format from either banks or capital markets and creative thinking is required to deal with the issue, the report warns.
Stakeholders in opco-propco structures will be hard put to meet the looming refinancing challenge, according to a report published by financial adviser Bishopsfield Capital Partners. The majority of opco-propco real estate structures - whereby a property company is split between an operating division (the opco) and a unit for its real estate (propco) - are unlikely to secure refinancing in their current format from either banks or capital markets and creative thinking is required to deal with the issue, the report warns.
The opco-propco structure was a popular financial engineering play during the debt-fuelled real estate boom of 2004-2008. Rather than dispose of real estate in a sale-and-leaseback to raise finance, a company could unlock the value of its property by splitting the business in two. The propco could then be geared up with high levels of cheap bank debt.
The structure was adopted to help finance takeovers such as UK retailer Debenhams being taken private and the acquisitions of car parking group NCP, hotel group Travel Lodge and Dutch non-food retailer Vendex.
The credit crunch of 2008 and ongoing financial crisis have drastically reduced the amount of debt available for opco-propcos that need to refinance their existing facilities.
Bishopsfield said the challenge facing the opco-propco is exacerbated by EUR 50 bn of CMBS transactions requiring refinancing between 2012-14. This reduces bank balance sheets, and produces weak valuations and funding gaps within legacy vehicles, according to Arjan van Bussel, partner of Bishopsfield Capital Partners and co-author of 'OpCo-PropCo: a redundant technique or here to stay?'.
'Funding gaps will require stakeholders in opco-propco structures to suffer pain. The post-crisis bank market is not deep enough to refinance large loans and the syndication market has also been adversely affected by the credit crisis,' Van Bussel said.
The rationale for the opco-propco models remains valid despite high-profile failures including this year's collapse of Southern Cross Healthcare, according to the report. Financing terms, such as leases with rising rents that prove unsustainable in business downturns, are seen as responsible rather than the structure itself.
