Matrix and HBOS in fund restructure talks

Matrix Property Fund Management is in talks with Bank of Scotland Corporate and several other parties about restructuring its UK property fund ahead of a refinancing deadline in July.

The property fund manager is in talks with the bank regarding its Matrix No 1 Unit Trust, which has breached its loan-to-value covenant of 80%, following the decline in UK property values. It now has a loan-to-value ratio of around 95%.

It is thought Matrix is discussing three options with Bank of Scotland Corporate, comprising a debt-for-equity swap, a possible write-off of some of the debt, or a refinancing of the fund, which could involve bringing in an equity partner.

Matrix No 1 is a closed-ended commercial property unit trust – domiciled in Guernsey – with around 1,037 unit holders.

It is one of two UK funds managed by Matrix – the other is the listed Matrix European Real Estate Investment Trust (MEREIT).

The No 1 fund, which had a distribution yield of 12.11% in March, has a range of UK properties and, at its peak in June last year, was valued at around £517m.

The properties in the fund are split across sector and region and include: 46% office, 31% industrial, 18% hotel and leisure, 4% cash and a 1% stake in MEREIT.

There is 16 years of unexpired income left on leases to a range of good covenant tenants. The fund’s debt facility with Bank of Scotland Corporate expires next July. One property in central London is funded separately by an unnamed German bank.

While the underlying loan of the fund – which was set up with an objective to provide a 6% annual income distribution and returns that outperform the Investment Property Databank Annual All Property Index by at least 1% a year – is performing, it could need an injection of equity to restore its loan to value ratio and rectify any further breaches if values fall further.

Matrix said it was talking to fund managers, UK and overseas investors, and banks about a range of options for the fund.

It has assessed the potential for selling single assets, selling the entire portfolio, which as a Guernsey-listed unit trust would be stamp duty protected, or seeking partners to inject equity.

An outright sale or asset-by-asset disposal has proved difficult because of the worldwide liquidity problems and a decline in property values.

If another fund manager or investor were to inject equity, it could lead to Matrix sharing or relinquishing its fund manager mandate.

Matrix is not offering to give up its fund management role but its role is to protect its investors’ equity and it could consider that possibility in exchange for an injection of equity and/or mezzanine finance into the fund. There is no plan to suspend dividend payments.

Any decision will ultimately be taken by Bank of Scotland Corporate, which itself is in a state of flux and subject to a takeover by Lloyds TSB.