Uni-Invest shows how CMBS deals may unravel It has been a long road from boom to eventual bust. But now restructuring experts have started to untangle the commercial mortgage-backed securities deals in Europe that went sour during the financial crisis. This week senior bondholders agreed a deal to recover some of the debt owed to them in the first case of a CMBS bond going into overall default. The European CMBS and wider real estate sector has already experienced many examples of problem loans due to falling property values and a lack of bank funding for refinancing. But Uni-Invest (Opera Finance) is the first example in Europe of CMBS bonds reaching their maturity date and not repaying. Uni-Invest's case offers a useful insight into the European CMBS market, particularly as a glut of transactions from the credit boom years of 2005-07 are due to mature in the next couple of years. It shows how, despite the complexity of unravelling what some nicknamed toxic deals, CMBS restructurings continue to attract private equity buyers. On Tuesday, senior bondholders accepted an offer proposed by TPG and Patron that will see the groups take over Uni-Invest, a Dutch property company with a range of assets. Senior bondholders will also recover their €359m share of €602m in debts. Yet the deal will mean junior bondholders are unlikely to recover anything. When a loan at the centre of the security defaulted two years ago, a two-year extension was approved. After working through a number of consensual restructuring options with a steering committee representing all four classes of note holders, a decision was made to press ahead with a sale of the property portfolio. Two potential buyers were identified. But Peter Hansell, head of real estate at Cairn Capital, which advised the special service group to Uni-Invest, says it became clear that the volatile markets of late last year would make it difficult for the private equity buyers to raise third-party debt. The auction was abandoned. With two months to go before the bond reached legal final maturity, a steering committee of the Class A noteholders was formed. Two plans emerged and were presented to noteholders. A plan to extend the CMBS bonds and hire Blackstone's Valad Europe to sell the property backing the bonds was rejected. Instead, senior bondholders chose to accept the TPG/Patron offer. With the flood of bonds issued at the height of the CMBS boom now approaching maturity, the question is whether Uni-Invest offers a template for other restructurings or is a one-off deal. Mark Nichol, credit analyst at BofA Merrill Lynch Global Research, says that across European CMBS transactions, it has not been possible to refinance 80 per cent of the loans in recent years. However, before Uni-Invest, the property vehicles had been able to restructure or find a buyer for the loans or properties before the bonds reached maturity. With banks and property groups unable or unwilling to buy up the loans, private equity players such as Apollo, Blackstone, Cerberus or Lone Star have been snatching up distressed debt at a 30 to 40 per cent discount to face value. Some banks may be more willing to lend at conservative levels to private equity buyers than the original borrower because private equity firms have usually bought the distressed loans at a discount, borrow at a lower leverage, and have a proven record of being able to sell the properties successfully. And because there's more upside for private equity, they are willing to pay the banks a higher margin," says Mr Nichol. Unravelling distressed CMBS property deals, however, is not simple. Keith McGregor, European head of restructuring at Ernst & Young, says one difficulty is that CMBS structures often have a "hard" maturity that is difficult to extend. Moreover, the deals are intricate, and many are unused to dealing with their challenges. "These restructurings can take a lot longer, as capital structures can be complex and, frankly, market participants in Europe have had to learn how to restructure these situations for the first time in this downcycle," Mr McGregor says. A senior fund executive eyeing distressed CMBS investments in Europe says that while there are clearly a lot of opportunities, the issue is how to unlock the value. It's complicated, and hard ... It's frustrating to see so many people just prolonging the problems by extending the maturities as far as they can. We think there will be more deals like this [Uni-Invest] ... There are a few hard maturities coming up now, and even more in the next two years. Mr Nichol believes that, for now, the Uni-Invest case is likely to remain a rarity in the European CMBS market. But we will continue to see private equity players competing to buy problem, or even performing, property loans from banks.