April 26, 2018 / 5:54 PM / 25 days ago

GGP brings biggest pro-rata term loan of 2018

NEW YORK, April 26 (LPC) - A US$7bn crossover loan package backing the US$15.3bn cash and stock acquisition of GGP, the second-largest mall owner in the US, by global commercial real estate giant Brookfield Property Partners LP, includes the biggest term loan A (TLA) financing of the year so far.

The large US$3.5bn dual-tranche pro-rata TLA, which is generally sold to banks rather than institutional investors, is part of a complex deal that will see Brookfield buy the remaining 66% of Real Estate Investment Trust (REIT) GGP that it does not already own.

The hybrid investment-grade/leveraged loan includes the pro-rata tranche, which is designed to maximize liquidity from banks. A US$2bn term loan B (TLB) is expected to attract institutional investors - especially CLO funds interested in higher-rated paper - despite some concerns over the retail sector.

The deal comes as many malls struggle to retain clients amid a prolonged downturn in brick and mortar retailing as online giants such as Amazon.com Inc continue to drain market share from traditional retailers.

S&P rated GGP BBB- on the understanding that GGP will be a “highly strategic subsidiary” to Brookfield, which is rated BBB by the ratings agency. Moody’s Investors Service rated the issuer Ba2 and the debt Ba3 due to support from Brookfield.

The large TLA also shows GGP’s desire to pay down debt and deleverage, an investor said. TLA debt is typically cheaper than TLB paper but is shorter-dated and has a faster amortization schedule with more restrictive terms.

“Banks are looking for funded assets,” a senior banker said. “It gives companies the flexibility to pay down debt over the short term, and reduce leverage as cash flow kicks in.”

Pricing on the pro-rata tranche is based on a grid which opens at 225bp over Libor, according to an investor, which looks attractive compared to average BB pro-rata spreads of 205bp, according to Thomson Reuters LPC data. Pricing on the TLB is being guided at the 225-250bp range, which also beats average BB TLB spreads of 215bp.

The hybrid loan’s pricing is also significantly jucier than typical investment-grade spreads of 143.7bp for BBB- loans, the data shows.

PRO-RATA BREAKDOWN

The pro-rata paper consists of a US$1.5bn term loan A-1, a US$2bn term loan A-2 tranche and a US$1.5bn revolving credit facility.

Wells Fargo is leading the TLA and Morgan Stanley is leading the TLB, sources said. The banks declined to comment. Joint bookrunners include Deutsche Bank, RBC, Bank of America Merrill Lynch, Barclays, HSBC, SMBC and Toronto Dominion.

Moody’s forecasts net debt-to-Ebitda of up to 10 times after the acquisition but expects GGP to reduce its debt using cash from asset sales and excess cash flow, but investors remain wary of the retail and real estate sectors.

“I’d say my concerns are definitely there,” an investor said. “I think there’s a lot of risk in that sector specifically. So far it seems like they (GGP) have done a pretty good job at increasing rents and occupancies, but this is an industry where you need to be looking forward and not backward. You have to be able to convert retail stores.”

Concerns aside, demand for floating-rate debt, especially with higher ratings, has been seemingly insatiable as investors seek to hedge against rising interest rates. Loan funds have seen inflows for nine consecutive weeks.

Demand for TLA paper is robust due to a 40% drop in supply in 2018 so far. So far issuers have raised only US$29bn of pro-rata term loans this year versus US$48bn a year earlier. Only four TLAs of US$1bn or more have been completed this year, including a US$1.5bn TLA from Global Payments Inc.

With the TLA taking such a big portion of the debt package, the broadly syndicated TLB is in shorter supply, which should make it an easier sell, a second investor said.

Brookfield Property Partners is one of the world’s largest commercial real estate companies and was formed through a spinoff from Bookfield Asset management in 2013. It has US$68bn in total assets, including London’s Canary Wharf Group.

The company announced the deal to buy the remainder of GGP on March 26 after GGP previously rejected a US$14.8bn offer. Goldman Sachs and Citigroup are financial advisers on the current deal.

GGP is a public company that is headquartered in Chicago and focuses on owning high end retail properties in the US. Its portfolio includes Fashion Show in Las Vegas and Water Tower Place in Chicago.

Brookfield did not return a request for comment.

Additional reporting by Lynn Adler Reporting by Jonathan Schwarzberg Editing by Tessa Walsh

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