LONDON (Reuters) – Lenders to McCarthy & Stone, Britain’s largest retirement homes builder, including Lloyds Banking Group are poised to take control of the company, sources close to the deal said on Wednesday.
Banks have proposed a debt-to-equity swap that will cut debt to 500 million pounds from 700 million, but want to take all of the equity in the new company to help recover their investment, the sources said.
Lloyds Banking Group (LLOY.L) is playing an active role in negotiations, sources said, and is expected to own a significant chunk of the company — which it inherited from Bank of Scotland — if the proposals are accepted.
McCarthy & Stone has been talking to lenders since last August about re-negotiating its 2006 buyout debt when it was bought by Bank of Scotland-led consrtium and reached a standstill agreement with lenders after missing a payment in December.
The company was unable to service its debt after the housing market slump meant that elderly people were unable to sell their properties to move into care homes.
“It’s a good business but overlevered,” a source close to the talks said.
McCarthy & Stone exepects to conclude a lock-up agreement with investors this week which would see a ban on further loan trading that would prevent more distressed investors from taking a position.
“We understand that the scheme has been given strong support and the lock-up is expected to be concluded this week,” a spokesman at McCarthy & Stone said.
HBoS, now part of Lloyds Banking Group, declined to comment.
REUBEN OFFER REJECTED
Banks have already rejected an offer from property investors the Reuben brothers and a second investor to match the banks’ proposals, on the grounds that the investors would control the equity.
The bank proposals are taking longer to execute due to the involvement of distressed investors, sources said.
“The situation is similar to Crest Nicholson; the only thing is more distressed investors came in with different agendas,” a senior loan trader said.
UK housebuilder Crest Nicholson last week agreed a debt-for-equity swap with lenders who wrote off 630 million pounds of its 1.1 billion pounds of debt in exchange for 90 percent of the company.
Junior lenders are currently battling the bank proposals on McCarthy & Stone and are threatening to take senior lenders to court if they are offered nothing, sources said.
“It’s going to be much more controversial to get the second lien and mezzanine (holders) on board, as they’re trying to fight for a larger piece of the pie,” the loan trader added.
A loophole in the loan documentation means that the company will have to pay an estimated 30-40 million pounds of costs if there is a dispute between senior and junior lenders, sources close to the talks said.
Banks are currently approaching their credit committees to gain approval on the proposals for the new 500 million pounds loan, which they will try to present to junior lenders as a fait accompli when credit approval is received, they added.
Bids on McCarthy & Stone’s second lien loans firmed in secondary loan trading as investors priced in the proposals, although the low levels reflect the probability of low recovery rates.
Average bids on McCarthy & Stone’s second lien tranche increased to 2.3 percent of face value from 1 percent last week and the mezzanine was unchanged at 1 percent, data from Thomson Reuters LPC shows.
The 1.04 billion pounds debt backing McCarthy & Stone’s 1.1 billion pounds acquisition by property investors David and Simon Reuben and retail entrepreneur Tom Hunter was led by Lloyds Banking Group’s Bank of Scotland in 2006.
The loan included 890 million pounds of senior debt and 150 million pounds of junior debt, split into 40 million pounds of second lien and 110 million pounds of mezzanine.
Any recovery in the overall property market may not hit the retirement care home sector immediately, said Panmure Gordon analyst Rachael Waring.
“Although there is underlying demand, it’s a very difficult sector to be operating in at the moment,” she said.
“It’s going to lag a recovery in the housing market, there must be a great demand for retirement demand an increasing market, but only in normal conditions.
By Tom Freke and Zaida Espana
(Additional reporting by Lorraine Turner & editing by Tessa Walsh; Editing by David Cowell)