BPT is the UK’s largest-quoted owner of tenanted residential property in the private sector.
It effectively announced that it would quit the stock market last June, by saying that its shares were at too much of a discount to net asset value. After putting itself up for sale in August, exclusive negotiations began on 4 December with BPIL, a newly-incorporated company backed by Deutsche Bank’s Real Estate Private Equity Group (DB REPEG) and listed property investment company Grainger.
The deal was delayed by three weeks after it was discovered that a BPT subsidiary called Bridgewater should have been regulated by the Financial Services Authority (FSA) due to the nature of its life tenancies business. Bridgewater buys homes from the elderly who remain resident in them.
Dechert partner Trevor Beadle says: “Three weeks may not sound like a lot of time, but when you’re preparing bid finance it is a significant amount of time. There were so many teams involved that running them for an extra three weeks and bringing in extra people represents a serious problem.”
As head of banking, finance and securitisation, Beadle led the combined banking and property finance team appointed by the lenders. The exposure of the regulatory issue led to all-party discussions. With FSA approval, the decision was made to novate the offending contracts to a licensed provider of life products, Standard Life.
Dechert can claim much of the credit for the discovery. The firm agreed a sample programme to deal with the 11,000 properties involved and selected the largest properties for checking.
Beadle says: “In particular, we required that the life tenancies were properly checked as to their regulatory position. That was a key requirement, and it was in the course of that requirement that the unregulated business, relating to the life tenancies, was unearthed.”
His team is advising longstanding client Nationwide Building Society as agent, security trustee and as a lender, the other two lenders being the Royal Bank of Scotland and Halifax. Each underwrote £200m of debt. The team included head of property finance Patrick Gloyens.
A&O won the work to advise BPIL through its relationship with Deutsche Bank. The team is led by corporate partner Alison Beardsley. Banking partner David Murray is advising on the acquisition debt, while head of property Adam Cleal is leading a team advising on property matters.
A key role for Cleal was to agree with the client on how to tackle due diligence in the best added-value way on a huge portfolio of small properties. The result was a combination of due diligence and providing comfort through other means, such as title insurance.
The pattern of investment banks teaming up with management operators to take over property companies is now well-established. In June, Dechert acted for the debt provider in the successful bid for Dencora and subsequently acted for the debt provider in the successful bid for Bourne End Properties.
Beadle says: “We’ve been part of the business of buying up listed property companies and structuring the realisation of those assets in a way that creates greater liquidity in the property market.”
A&O has also benefited from the trend. Last year, it advised DB REPEG on Arrow Property Investment’s £138m take private of Allied London Properties.
Beardsley at A&O says: “There’s been a steady flow of these deals during the past few years, which is great for lawyers. As transactions, the interesting thing is that they bring together a complete range of discreet deals.”
Beardsley hopes to win future instructions should Deutsche Bank continue to have an appetite for this kind of deal.
At Dechert, Beadle says the latest transaction for BPT moves into new territory, away from buying only asset-rich property companies. “The ordinary rent payable [on BPT’s portfolio] is not in itself enough to service the interest costs on the debt,” he says. “So the interest structure for the payment – the way that the company treats its cashflow and the amounts required for capital amateurisation – had to be designed so that the structure could support the senior debt on terms that would be acceptable to the senior debt market.
“These assets have a very limited income stream, but we nevertheless managed to structure the senior debt so that it’s on market terms.”
The target is advised by Pinsent Curtis Biddle on corporate matters, with Hammond Suddards Edge advising on property issues. Dickinson Dees is acting for Grainger.