Trinity College takes 50% stake in Tesco sale-and-leaseback
By James Wallace - Friday, January 27, 2012 12:45
Trinity College, the University of Cambridge College founded by King Henry VIII in 1546, has taken a 50% equity stake in the portfolio of 11 UK Tesco supermarkets, which the giant retailer closed in a £450m credit-linked CMBS against yesterday, CoStar News has discovered.
The stake in the £440.5m portfolio has been bought by the College’s (pictured) circa £700m independent endowment fund for what is thought to be only a nominal fee in view of the fact that the University College will not derive any economic benefit from its ownership until the maturity of the real estate bonds at least 22.5 years into the securitised loan’s 30-year maturity.
The bonds priced yesterday afternoon at 275 basis points over the 4.25% 2032 gilt benchmark, with the coupon set at 5.66%. UK accounts took 96% of the bonds, with the balance overseas. Around 78% of the investors were fund managers, 18.5% insurance companies and 3.5% others.
HSBC, Goldman Sachs, The Royal Bank of Scotland and Lloyds Banking Group were joint arrangers on the deal, with the bonds thought to be oversubscribed.
The portfolio is comprised of 11 Tesco supermarkets which range in value from £13.9m to £71.7m, comprising stores in: Woolwich, Blackburn, Bradford, Doncaster, Rotherham, Great Yarmouth, North of Stoke-on-Trent in Kidsgrove, West of Crewe in Wicks and Haverfordwest in South West Wales. There are also two supermarkets in Scotland: north east of Dundee, in Arbroath, and north west of Aberdeen, in Inverurie.
The rent will be subject to an annual review in line with the RPI, subject to a minimum of 0% and a maximum increase of 5%. The rent payment dates will be June 24, Sept. 29, Dec. 25, and March 25. The rent payable for the Woolwich property will commence from December 2012, regardless of whether the development is complete. The gross rent on Day 1, assuming it includes amounts payable under the Woolwich lease, will be £22.85m per annum.
As with CMBS conduit deals, the income stream is backed by both security over the property and security over the income stream arising from the lease agreement. It is the same here, but interest payments are effectively guaranteed by Tesco PLC but are paid through occupational leases, which virtually nullifies the prospect of a default expect in the unlikely event of Tesco itself collapsing. This is what is meant by a credit-linked CMBS.
However, the downside is it is exposed to Tesco’s credit risk, normally CMBS is delinked from credit risk and a way of giving debt investors exposure to property and not company credit risk. Therefore, if Tesco credit suffers, bond could be downgraded even were the properties retain their value.
Regardless, the debt will be serviced through rental payments secured by real estate occupational leases and the deal, Tesco’s fifth in two-and-a-half years, is a timely reminder of alternative capital markets exits still available in these uncertain times.
Trinity College’s investment objective is to maximise its long term income growth, principally through investment in real estate and equities. In its financial year to June 2011, the College reported a £454,000 empty rates charge on its property portfolio, up from £278,000 in the previous year.
The College has a famous and historic alumni – including Francis Bacon, Isaac Newton, Alfred Tennyson, Bertrand Russell, six former Prime Ministers and, of course, the Prince of Wales – while the courtyard of the Trinity College itself was the scene of the famous The Great Court Run in the 1981 Chariots of Fire film.
jwallace@costar.co.uk