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Propco/Opco structures - Is the value and the security in the same place?

In the early - mid naughties, Propco/ Opco deals were all the rage.  By separating the real estate and operating assets of a business into separate corporate entities, borrowers secured greater leverage against the property assets, and could also tap into real estate funding that was not available for mainstream business funding.

The structure was particularly suited to businesses with substantial real estate assets that were integral to the operation of the underlying business.  Examples include retail businesses, care homes and hotels.  The result was heavily geared property portfolios and fixed high rents required to sustain the property deals.

Roll forward a few years and many of these Propco’s are in desperate need of restructuring.  Many are based overseas in the Channel Islands, the Caribbean or Denmark, and all are divorced from the underlying value in the businesses that operate in them.  Rent is no longer affordable (and because of the close relationship between Propco and Opco, seldom paid).  At the same time real estate values are such that the enterprise value is now equally important as the real estate value. 

In sectors such as care homes, not only will a ‘going concern’ valuation usually be materially more than a ‘vacant possession’ valuation, but the ‘vacant possession’ valuation will be subject to closure costs which will reduce realisations still further as well as bring about potentially adverse publicity.  

This might not be a problem, or at least would all be part of the same problem, if the lender had any control over the ‘business’ rather than just the real estate.   Unfortunately this is rarely the case.  Real Estate financing rarely looked at the underlying business and did not require a full security structure over both real estate and operating businesses.

It may seem like pointing out the obvious, but restructuring professionals should look at the underlying value of the overall enterprise.  From a lender’s perspective, if this points to a need to secure control of both real estate and the underlying business, then this should be put in place as a priority and as a condition of the necessary support requested.

This often means a debenture over the Opco, cross guarantee between Propco and Opco, an assignment of Opco’s rental income (note that a separate Deed is required in Scotland), and a charge over the shares in Opco so the lender can sell the shares without taking control of a heavily regulated, capital intensive and high risk business.  It may also include assignments of rights under operating agreements so that the lender can secure ongoing services during any at-risk period.

So to summarise, if you identify an opco/ propco structure without full cross security, think carefully about putting it in place as a cornerstone of future support.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Katharine Lawrenson

Partner - Head of Creditor Services

I am a partner in the Business Restructuring team. I deal with personal insolvency issues for the firm nationally, head up the firm's creditor services team and deal with corporate rescues and turnaround, debt advice, administrations, liquidations and restructuring.