Roppongi Hills
Asian Real Estate Deal of the Year 2002
Roppongi Hills
Roppongi Hills: 11 hectares of prime Tokyo real estate and Japan's largest urban redevelopment project. While the sponsor behind the redevelopment is Mori Building Co, a mid-tier Japanese property developer, Development Bank of Japan (DBJ) can take much of the credit for the financing of the ¥270 billion ($2.23 billion) project. The financing deal, signed in February 2002 and syndicated two months later, has become a landmark transaction for the country's project finance market. Roppongi Hills is Japan's largest ever non-recourse financing.
According to Akio Yamashita director in DBJ's Project Finance Department, the institution has been trying to promote non-recourse financing in Japan for several years, ?to help build a more efficient financial system,? Yamashita says. In broad terms, DBJ aims to wean Japan Inc off excessive dependence on direct loans and ultimately to encourage much more activity in the capital markets. ?Promoting non-recourse financings is an important first step,? says the DBJ official. Yamashita calculates that more than 30 non-recourse deals have closed in the Japanese market to date, with the 2001, $1.4 billion Kobe Steel transaction holding the previous record for the largest non-recourse deal.
And as Roppongi Hills is also a scheme initiated under Japan's Urban Redevelopment Law (DBJ has traditionally played a strong role in officially sanctioned urban regeneration projects) it was no surprise that DBJ agreed to a pivotal role in the financing.
Indeed, sources argue that the deal could not have been done without the bank's helping hand. Shinroku Wakayama, deputy general manager in the Real Estate Finance Division of Mizuho Corporate Bank points out that, apart from the challenge of syndicating such a large non-recourse deal, the performance of such a large mixed-use complex is uncertain. ?DBJ's involvement helped commercial banks get much more comfortable with the deal,? Wakayama suggests.
Roppongi Hills is destined to be used for office, residential, shopping, hotel and entertainment purposes. The buildings will be leased out by a real estate trust and the rents passed on via trust bank, Mitsubishi Trust & Banking Corp to the bankruptcy remote financing vehicle, Roppongi Hills Financial Corp.
Included in the ¥170 billion debt package, comprised of construction loans and take-out commitments, is a DBJ loan of over 10 years and a commercial loan (with a tenor of about five years). The commercial loan was arranged by Mizuho Financial Group and Sumitomo-Mitsui Banking Corporation. At the request of Mori, which is an unlisted Japanese company, precise details of the deal are not being revealed by the deal participants. However, it is understood that the DBJ loan accounts for a substantial portion of the total debt amount.
The commercial construction loans were guaranteed by Mori but the long term loan refinancing the construction loans are not guaranteed. DBJ's construction and permanent loans are initially guaranteed by the sponsor. The financing includes a so called ?stabilization period? of two years following construction to allow the project to reach economic completion (when project cashflows will be sufficient to meet debt service.) The commercial, long term loan enjoys a form of credit enhancement in that full drawdown is dependent on the debt service coverage ratio and other performance tests.
The pricing premium for Mori compared with an equivalent corporate financing was not disclosed. ?150bps over Libor for a five year deal is roughly what a company would typically pay for a non-recourse facility and the Mori deal was close to that,? comments another source involved in the financing.
12 banks, including the arrangers, participated in the deal (the original number of banks involved was 14 but this reduced due to the mergers which have taken place in the Japanese bank market). No foreign banks were involved.
The transaction marked a change of financing policy for Mori, which, like most Japanese corporates, had traditionally raised funds through the bank market. The lead time taken to complete various previous projects had increased leverage for the company and while it was not as concerned about gearing as a typical listed company, Mori also recognized that the size of the project combined and the continued weakness in the Japanese real estate market presented significant risks that might be mitigated through an non-recourse financing. ?Average annual revenue for the company in 2002 was about ¥100 billion, quite a bit smaller than the total project cost of ¥270 billion,? says Wakayama. Mori also already had experience in less traditional financings. In 2000, Mori securitized receivables from ARK Towers (another residential property development) to diversify funding sources.
According to Tsutomu Horiuchi, head of the Corporate Financial Strategy Group at Mori, another key factor in the decision to mandate a non-recourse deal were the changes taking place in Japan's financial markets. ?We previously relied solely upon corporate loans from commercial banks but it had become necessary to diversify our sources of capital,? says Horiuchi.
Horiuchi says the complexity of valuing future cash flows was the most difficult aspect of the financing. ?As a large-scale redevelopment and as a multi-use complex, Roppongi Hills was an intricate project. We had to provide a great deal of information and figures so that the lenders could be comfortable with the projected cash flows,? the official says.
Wakayama expects more non-recourse real estate transactions in the future as the government continues to implement its urban renaissance program and because property developers will look to mitigate their risks in the face of continued real estate market uncertainty. Another slice of central Tokyo is now earmarked for development close to Roppongi, having been recently sold by Japan's Ministry of Defense. This project could also generate a non-recourse financing.
Roppongi Hills Financial Corp.
Status: Signed and syndicated April 2002
Size: ¥270 billion (¥470 billion including land costs)
Location: Tokyo
Description: Urban redevelopment project
Sponsor: Mori Building Co. Ltd
Debt: ¥170 billion
Leverage: 63%
Lead arrangers: DBJ, Mizuho, SMBC
Legal adviser to project company: Morisogo
Legal adviser to lenders: Anderson Mori and Nishimura & Partners
Financial adviser to project company: Mizuho Securities Co., Ltd.
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Roppongi Hills
Roppongi Hills: 11 hectares of prime Tokyo real estate and Japan's largest urban redevelopment project. While the sponsor behind the redevelopment is Mori Building Co, a mid-tier Japanese property developer, Development Bank of Japan (DBJ) can take much of the credit for the financing of the ¥270 billion ($2.23 billion) project. The financing deal, signed in February 2002 and syndicated two months later, has become a landmark transaction for the country's project finance market. Roppongi Hills is Japan's largest ever non-recourse financing.
According to Akio Yamashita director in DBJ's Project Finance Department, the institution has been trying to promote non-recourse financing in Japan for several years, ?to help build a more efficient financial system,? Yamashita says. In broad terms, DBJ aims to wean Japan Inc off excessive dependence on direct loans and ultimately to encourage much more activity in the capital markets. ?Promoting non-recourse financings is an important first step,? says the DBJ official. Yamashita calculates that more than 30 non-recourse deals have closed in the Japanese market to date, with the 2001, $1.4 billion Kobe Steel transaction holding the previous record for the largest non-recourse deal.
And as Roppongi Hills is also a scheme initiated under Japan's Urban Redevelopment Law (DBJ has traditionally played a strong role in officially sanctioned urban regeneration projects) it was no surprise that DBJ agreed to a pivotal role in the financing.
Indeed, sources argue that the deal could not have been done without the bank's helping hand. Shinroku Wakayama, deputy general manager in the Real Estate Finance Division of Mizuho Corporate Bank points out that, apart from the challenge of syndicating such a large non-recourse deal, the performance of such a large mixed-use complex is uncertain. ?DBJ's involvement helped commercial banks get much more comfortable with the deal,? Wakayama suggests.
Roppongi Hills is destined to be used for office, residential, shopping, hotel and entertainment purposes. The buildings will be leased out by a real estate trust and the rents passed on via trust bank, Mitsubishi Trust & Banking Corp to the bankruptcy remote financing vehicle, Roppongi Hills Financial Corp.
Included in the ¥170 billion debt package, comprised of construction loans and take-out commitments, is a DBJ loan of over 10 years and a commercial loan (with a tenor of about five years). The commercial loan was arranged by Mizuho Financial Group and Sumitomo-Mitsui Banking Corporation. At the request of Mori, which is an unlisted Japanese company, precise details of the deal are not being revealed by the deal participants. However, it is understood that the DBJ loan accounts for a substantial portion of the total debt amount.
The commercial construction loans were guaranteed by Mori but the long term loan refinancing the construction loans are not guaranteed. DBJ's construction and permanent loans are initially guaranteed by the sponsor. The financing includes a so called ?stabilization period? of two years following construction to allow the project to reach economic completion (when project cashflows will be sufficient to meet debt service.) The commercial, long term loan enjoys a form of credit enhancement in that full drawdown is dependent on the debt service coverage ratio and other performance tests.
The pricing premium for Mori compared with an equivalent corporate financing was not disclosed. ?150bps over Libor for a five year deal is roughly what a company would typically pay for a non-recourse facility and the Mori deal was close to that,? comments another source involved in the financing.
12 banks, including the arrangers, participated in the deal (the original number of banks involved was 14 but this reduced due to the mergers which have taken place in the Japanese bank market). No foreign banks were involved.
The transaction marked a change of financing policy for Mori, which, like most Japanese corporates, had traditionally raised funds through the bank market. The lead time taken to complete various previous projects had increased leverage for the company and while it was not as concerned about gearing as a typical listed company, Mori also recognized that the size of the project combined and the continued weakness in the Japanese real estate market presented significant risks that might be mitigated through an non-recourse financing. ?Average annual revenue for the company in 2002 was about ¥100 billion, quite a bit smaller than the total project cost of ¥270 billion,? says Wakayama. Mori also already had experience in less traditional financings. In 2000, Mori securitized receivables from ARK Towers (another residential property development) to diversify funding sources.
According to Tsutomu Horiuchi, head of the Corporate Financial Strategy Group at Mori, another key factor in the decision to mandate a non-recourse deal were the changes taking place in Japan's financial markets. ?We previously relied solely upon corporate loans from commercial banks but it had become necessary to diversify our sources of capital,? says Horiuchi.
Horiuchi says the complexity of valuing future cash flows was the most difficult aspect of the financing. ?As a large-scale redevelopment and as a multi-use complex, Roppongi Hills was an intricate project. We had to provide a great deal of information and figures so that the lenders could be comfortable with the projected cash flows,? the official says.
Wakayama expects more non-recourse real estate transactions in the future as the government continues to implement its urban renaissance program and because property developers will look to mitigate their risks in the face of continued real estate market uncertainty. Another slice of central Tokyo is now earmarked for development close to Roppongi, having been recently sold by Japan's Ministry of Defense. This project could also generate a non-recourse financing.
Roppongi Hills Financial Corp.
Status: Signed and syndicated April 2002
Size: ¥270 billion (¥470 billion including land costs)
Location: Tokyo
Description: Urban redevelopment project
Sponsor: Mori Building Co. Ltd
Debt: ¥170 billion
Leverage: 63%
Lead arrangers: DBJ, Mizuho, SMBC
Legal adviser to project company: Morisogo
Legal adviser to lenders: Anderson Mori and Nishimura & Partners
Financial adviser to project company: Mizuho Securities Co., Ltd.
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