Is HMRC guilty of turning Halabi’s White Tower into a white elephant?

The prime rental market in the City has plummeted over the past year and a half, leaving lenders struggling to ascertain the best way of dealing with the bad loans on their books. Despite initial predictions to the contrary, banks prefer restructuring their portfolios to calling in the administrators.

The case of the White Tower commercial mortgage-backed security (CMBS) has piqued the interest of observers.

“It’s very high-profile and one of the larger examples of what’s been going on with the defaulted loan market,” says Paul Hastings finance partner Charles Roberts, who is advising the special servicer of the securitisation, real estate broker CB Richard Ellis. ­”Everybody’s expecting to get more problems in the CMBS market.”

But has the attention White Tower has elicited been because seven of the Central London ­property assets that back the bond were recently pushed into liquidation, with Alan Hudson and Alan Bloom at Ernst & Young having been appointed as administrators? Or has the interest got more to do with the involvement of high-­profile tenants such as Aviva and JPMorgan and the fact that the bond was issued by property tycoon Simon Halabi?

Three years ago Syrian-born businessman Halabi issued bonds valued at £1.45bn via his holding company White Tower. The security was backed by nine prime Central London office blocks worth a total of £1.8bn in locations including the City and Bankside. However, the security had a short maturity and when the properties were revalued earlier this year they were worth £929m, almost half their original amount, leading bondholders to demand immediate repayment.

But despite the dramatic drop in value one lawyer involved in the process believes it was far from inevitable that the assets would be forced into liquidation. In fact, had it not been for a series of ­wind-up petitions issued by HM Revenue & Customs, which was seeking to recover £4.8m in unpaid tax on seven of the nine properties, the source contends that liquidation may have been avoided altogether.

“In the past the Revenue has taken a passive approach [to this issue],” the lawyer says. “This aggressive action forced [the assets] into insolvency. It could have been avoided. They’re all good properties, all let to good ­tenants – there’s no question of them not paying.”

The properties concerned are Aviva Tower No 1, Bankside No 1, Carey Street No 1 as well as ­properties under the umbrellas of Leadenhall Court Holdings, ­Millennium Bridge Investments, Victoria Embankment Holdings and Victoria Embankment ­Properties. The lawyer thinks that value could have been maximised through changing management arrangements.

Halabi’s interest in the assets concerned was structured by means of an elaborate set of ­holding companies. One partner says there are “dozens upon dozens of SPVs [special purpose vehicles], a lot of partnerships and multiple JVs [joint ventures]” created at different times in accordance with changing tax regimes. SJ Berwin advised on the acquisition of the properties alongside Olswang partner Jonathan Lewis. SJ Berwin partner Nick Minkoff has been called upon to advise Halabi through the ­insolvency, with capital markets partner Farmida Bi at ­Norton Rose advising White Tower. Because of the sensitive stage the process is at – and perhaps also due to the ­reclusive nature of Halabi himself – neither Minkoff nor Bi would ­comment for this ­article. But it is not only the ­convoluted ­structures involved that will require some highly skilled lawyering, but also the multiple competing interests involved.

“The administrator would like to go in and liquidate and be done with it, and the servicer has a ­mandate to maximise value,” one partner involved in the process points out, while there are further differing concerns among the ­different classes of bondholders, with noteholders at the top likely to push for a quick sale.

Clifford Chance client Hatfield Philips was initially appointed as a special servicer, with the role of administering White Tower after it defaulted. As one of the largest European players in this field, it was a suitable choice, but provisions in the initial documentation allowed for the special servicer to be replaced should the B-note holders, or controlling class, push for this. This came about in August and a new entrant to the special servicing market, CBRE, took over.

Following this Hatfield Philips saw its role “significantly reduced”, according to one partner. Paul Hastings finance partners Conor Downey and Charles Roberts and restructuring and litigation partner Michelle Duncan were then ­handed roles acting for longstanding client CBRE.

The implications for the future integrity of the White Tower ­portfolio are unclear. One source involved says: “I don’t think ­anybody knows what will happen. There are a whole host of different properties and shareholders. I don’t think anybody knows if it will lead to a restructuring, if ­Halabi will continue with an ­ownership role, or whether it will be broken up.”

But others speculate that, as Halabi was not seen as an active manager, he would be unlikely to retain an equity interest.

Another partner says: “Given the size of the portfolio it would be prudent to manage [any sale] over one or two years – you wouldn’t want to flood the market at one time with all these properties.”

The cautious attitude adopted by investors six months ago meant that could have been true. But since the summer real estate investment partners have been buoyed slightly by a mood of apparent optimism in the City, with reports that investors really are poised to pounce.

Herbert Smith investment ­partner Simon Price, who is not involved in White Tower, ­comments: “A lot of people are wanting to buy assets – they’re rolling their sleeves up and ­actively looking to buy assets.”

If the seven assets in question are snapped up then it would debunk the notion of oversupply and would give one extra reason – alongside an arguably avoidable insolvency process and the ­fluctuating wealth of a property magnate – to see White Tower as an eloquent tale of our times.