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Western Europe: No break in sight for real estate borrowers

Long-term hedging put in place before 2007 has become an extremely expensive problem for banks looking to sell down their real estate exposure.

As London’s glut of commercial real estate balloons following the addition of 585,000 square feet of unlet office space in The Shard this month, the full implication of all these empty desks is being felt at addresses across the UK capital. One such address is Citypoint Tower, a 703,382 square foot building at One Ropemaker Street in the City of London that might soon be on the market if the collapse of a restructuring deal on its £429 million ($669 million) outstanding senior debt in late May leads to enforcement. Like many other borrowers, its owner, Beacon Capital Partners, faces a standoff between its junior and senior lenders as well as a crippling £100 million bill to break the interest rate swap that was put in place to hedge the senior loan. The CMBS deal was arranged by Morgan Stanley.

Beacon Capital Partners is not the only borrower in this position. Investors in a similar deal for troubled real estate investment group Propinvest are facing eye-watering swap breakage costs of £273 million on a CMBS deal called Gemini Eclipse arranged by Barclays Capital in 2006 and originally valued at £1.2 billion. The now-defaulted deal is backed by a portfolio of 34 properties.

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