Goodman fund in £300m asset injection

Goodman and Legal & General are thought to be close to completing an innovative £300m asset-for-equity swap in the £1.5bn Arlington Business Parks Partnership fund.

The four existing investors in the fund – Goodman, Legal & General, Prupim and a Middle Eastern investor, believed to be the Abu Dhabi Investment Authority – have all agreed to the ‘fund recapitalisation’, which will ensure the fund is in a strong position for 2009. This involves £300m of properties that have no debt attached being put into the fund.

The measure will prevent the Arlington fund from breaching bank covenants if values fall further.

The fund, which owns 18 UK business parks, does not have an immediate problem with its loan-to-value covenants or its interest covenants. However, it is thought further declines in value would cause a breach unless preventative steps were taken.

The fund has £1.2bn of debt – £400m in a revolving credit facility with Eurohypo and the Royal Bank of Scotland and £800m of commercial mortgage-backed securities issued by the Epic Opera (Arlington) vehicle.

The loan-to-value ratio of the properties in this package at the end of October was 74.99% – close to the covenant of 77% but not in breach.

A Fitch ratings report released in June warned a further fall in values could ‘trigger an event of default’ unless the borrower took action. However, the investors’ asset-for-equity swap will put the fund in a strong position.

Goodman has also been making voluntary repayments into the fund to decrease its leveraging.

Across the fund, the loan-to-value ratio is 58%, against a considerably higher covenant. Following the £300m injection, Goodman estimates the ratio will drop to 49%.

The fund holds 75% of built assets and 25% development land’ following its purchase of developer Akeler in 2006 for £649m.

The plans were launched as part of a wider initiative at the end of October across the Goodman business that aimed to repair its balance sheet.

Goodman and L&G declined to comment.