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6.4.3 Risk Appraisal

This financing represents the opportunity for the Lender to start the relationship with the Fund and to consolidate the existing global relationship which is in place with Prime Ltd. This new financing opportunity presents tangible cross-selling opportunities with financial markets

Balance sheet

FIGURE 6.26 Balance sheet

(potential hedging products related to the Mortgage Loan facility) and payment cash management (management of bank accounts of the Borrower). Structure risk

The Borrower is an existing SPV directly holding the Property and fully indirectly owned by the Fund. The Fund has an average annualized distribution yield since inception equal to 6%. Given the strong performance of the Property, the Borrower is significantly contributing to such distributions. Since the Borrower is a SPV without recourse to other entities, the structure risk is considered average,[1] though adequately mitigated by a strong security package (first ranking mortgage on the Property plus additional securities such as pledge on SPV quotas, pledge on Borrower bank accounts, assignment of lease contracts, hedging and insurance receivables) and an adequate set of financial (LTV, ICR) and non- financial covenants (change of control, change of Fund Manager clauses[2]). Real estate analysis

Property. The Property is a prime shopping mall with a total GLA of 30,000 m2 divided into 150 units. The Property was completed and opened five years ago and has a successful track record in terms of visitors and turnover. Given the successful and stabilized performance and in view of the significant catchment area of the Property, an extension of 10,000 m2 GLA has been started and is expected to be completed in Year 1, bringing the total size of the scheme to 40,000 m2. The Property is well equipped with 3,000 car spaces

Profit and loss

FIGURE 6.27 Profit and loss

resulting in a very good ratio of one space per 10 m2 of GLA. The Property is open all year round and trades through a wide range of prime brands, from 10 a.m. to 9 p.m. including Sundays, and is closed only three days a year.

Location: The Property is located in a densely populated area. The catchment area demonstrates a large population with above national average per capita disposable income and above national average levels of consumption. More specifically, approximately 3.5 million inhabitants live in the 0-60 minute drive time isochrone, whereas the 0-30 minutes radius counts more than 2 million inhabitants. Upon completion of the planned extension, it is expected that the Property will further consolidate its leading position within the abovementioned catchment area.

Tenancy. The Property is fully let to 150 tenants with a diversified tenant rent-roll both in terms of GLA and passing rent. Annual Minimum Guaranteed Rent (MGR) from lease contracts in place is equal to €11 million, reaching an amount of €13 million including turnover/ variable component and income from temporary lettings/mall income. Total MGR is expected to reach €14.7 million upon opening of the extension (additional GLA entirely pre-let through binding agreements bringing additional annual rent of €3.7 million). The tenancy has a predominant fashion component and hosts a number of national and international prime fashion/ designer collection brands, casual clothing brands, sport brands, footwear, and other accessories. Top ten tenants represent 20% of total MGR. The average rental level is €366/m2/year on MGR basis. Weighted Average Life of leases at first break stands at approximately five years with next expiry peaks in 2017 and 2018. The Property has totalized a total turnover of €120 million over the last 12 months (equivalent to €4,000/m2) resulting in an average current effort ratio (MGR/Tumover) of 9.1% which can be considered very good for a retail asset of this type and location.

Valuation: The OMV of the Property has been assessed by an international independent appraiser following RICS standards and covering all Fund portfolio on a semi-annual basis. Last year's valuation reports an OMV of €150 million, reflecting a gross initial yield on existing MGR of 7.3% in line with current market conditions and comparable evidence for prime shopping malls. This value is a fair assessment for a prime retail scheme such as the subject Property and adequately reflects its location, tenancy, and level of competition.

Reputation risk: Considering Sponsor/Fund Manager solid track record as investor and asset manager on a global scale as well as the strong performance of the Fund and the proven track record of the Borrower/Property, reputation risk is considered below average. Repayment

Given the very low leverage at Fund level (less than 40%) and the relatively easy access to credit recently proven by the Fund controlled SPVs, refinancing risk is assessed as acceptable. On the basis of figures taken from the annual report of the Fund on existing lenders and amounts of the respective facilities in place, no breaches of financial covenants have occurred. It is therefore expected that the Borrower will repay the facility through a disposal of the asset to another core institutional investor or through a refinancing.

6.4.4 Risk Rating and Risk-Reward

The facilities are in line with the lender secured lending policy paper in terms of amount, level of covenants, tenor, and quality of the collateral:

• Risk rating: equivalent to investment grade;

• Risk adjustment return on capital: above thresholds;

• Sanity check:[3] significantly above minimum thresholds of profitability set by the lender's committee, in view of pricing of the transaction (400 bps) that adequately remunerates the RWAs of the deal.

6.4.5 Conclusion and Recommendation

The credit application is presented to the lender's credit committee with a recommendation such as the one below, so that the committee can take its final decision which is formalized through a separate decision sheet.


1. that the Property has a very strong and consolidated track record and is the top perfonner in its large catchment area;

2. the moderate initial LTV (50%), that will further decrease upon completion of the planned extension (below 40%);

3. the very good risk-reward profile of the transaction;

4. the strong reputation of the Sponsor/Fund Manager as retail investors and asset managers on a global scale, with strong commitment to the Italian market;

5. the opportunity for the Lender to consolidate the relationship with a key client like Prime with tangible cross-selling potential;

approval is recommended with respect to this financing request.

  • [1] A non-recourse structure is considered “average risk" since it is not guaranteed by parent companies, but only by the credit capacity of the SPV/Boixower and, ultimately, of the Property.
  • [2] Since actual cash flows of the property depend also on the capacity of the Fund Manager, if the Fund Manager changes, the Lender has the right to get the money back.
  • [3] Ratio between revenues generated by the transaction and risk-weighted assets (RWA) allocated on the subject deal. More specifically, RWAs are function of EAD (Exposure At Default), LGD (Loss Given Default). PD (Probability Of Default), and tenor/maturity of a loan.
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