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Avison Young deleverages corporate finances, gets S&P downgrade

CEO Mark Rose calls downgrade 'technicality': investment deal slashes company's debt, positions it for further growth

Mark Rose, CEO and chairman of the board of Avison Young. (Courtesy Avison Young)
Mark Rose, CEO and chairman of the board of Avison Young. (Courtesy Avison Young)

Real estate services company Avison Young has completed a "deleveraging" of its corporate finances that CEO Mark Rose says positions it to ride out challenges facing the sector, despite downgrades of its credit rating and corporate management by S&P Global Ratings late Friday.

In a weekend interview with RENX, Rose called the downgrades by S&P a “technicality” and said he expects the firm to revisit its positions on Avison Young in the coming weeks. 

Rose said Avison Young had planned to unveil the refinancing transaction Monday morning. When it informed S&P of details on Friday, the ratings agency replied that under its criteria - because the refinancing negotiations were not yet public information - it was obliged to immediately issue the downgrades. 

”We were about to announce a very positive, very successful restructuring that positions this company for continued strategy and growth,” Rose told RENX. “The company is still in the hands of the company and (we had) all these good things to say, and unfortunately we got blindsided by a technicality.”

S&P stated Avison Young “failed to make required quarterly principal and interest payments on its senior secured term loan.”

As a result, it downgraded Avison’s Young issuer credit rating to SD (selective default) from CCC, and to D from CCC- on its senior secured term loan. It also downgraded its management and governance assessment to “negative” from “moderately negative”.

Rose says Avison Young not in default

Rose, however, called the default notation “incorrect”. The non-payments, he said, were agreed to in advance as part of negotiations during the past 15 months to inject additional funding into the company. 

Rose said Avison Young has “never missed a payment because we have a revolving facility that we’ve been paying, the total resolution of our cap stack was in agreement with our lenders and investors not to pay interest. It wasn’t due to be paid.”

That deal, he said, is signed by all its investors and lenders with the main results being a “very minor” shift in the percentage of employee ownership and a reduction to its board of directors. The transaction is to close in March (EDITOR'S NOTE: As of March 13, the financing transaction has now closed).

Currently at 11 members, the board will be pared to five with Rose, two independents appointed by Avison Young and two independents appointed by the lenders and investors.

The six departing board members are two appointees by investor CPDQ (which injected $250 million into the firm about five years ago to fund expansion and growth) and four internal directors appointed by Avison Young.

In light of this information, S&P did note in its announcement that, “We expect to review our issuer credit rating on Avison Young in the coming weeks when we receive additional information about its intentions to meet these and other financial obligations.”

Avison Young is based in Toronto. The global firm has approximately 5,000 employees in over 100 offices in 19 countries, and its property management portfolio comprises over 283 million square feet.

Funding allows it to continue growth trajectory

Rose said the financing deal is a significant vote of confidence by the company’s investors, and positions it to continue its strategy of growth and to benefit from a commercial real estate industry recovery that he expects to begin within the next six months to a year.

“The bottom line is that in the latter stages of 2022, we saw the absolute pullback in lending, interest rates started to skyrocket, our clients couldn’t get loans, and having been in this business for 40 years, I said ‘I can’t tell you how bad this is going to get, but this is going to get bad,’ ” Rose said.

“We’ve spent the last 15 months working out a deal where absolutely everybody, 100 per cent of all of our investors and all of our lenders, are on board. The deal is signed, it was about to close in a week or so.”

With new equity from existing investors, Rose said the company will significantly reduce its debt.

“Everybody who was in is still in, they are putting up new money and they are eliminating more than 50 per cent of our obligations,” Rose said, “and for that, we’re giving them just a little bit of equity because the principals of this company own the majority of the company to begin with and they will continue to own a large majority of the company after.”

Rose did not reveal further ownership information, citing internal confidentiality.

For Avison Young’s employees, Rose said there will be no changes.

“There are no management changes, there is no cost-cutting, there’s no restructuring. We are done, past all of this and we’ve set the company up to continue pursuing this strategy.”

Rose said one significant development which supports the reorganization is that while the “friendly” negotiations were ongoing, Avison Young made two significant acquisitions and continued to expand its global reach.

“To back this up, we acquired a company on Jan. 3 (Madison Marquette). We bought a couple of companies in the last year while this was going on, adding about 250 people to the company. We’ve added affiliates in Vietnam and Croatia, so third parties know what’s going on here, obviously our lenders and investors, they know what’s going on here.”

"The sky is down. The sky fell already"

Avison Young’s multi-faceted business is focused about 65 per cent on brokerage and 35 per cent on management, consulting, project and facility management and other related services.

Traditionally, about half its business has come from capital markets and the other half from leasing. In the past couple of years, it’s been about 75 per cent leasing.

“Everybody’s looking for the sky to fall, but the sky is down,” he said, noting this is a theme he has been espousing during major global presentations for the past several months. The sky fell already. Now the next step is up, but it’s most likely the back half of this year if not potentially the first part of 2025.

“We are seeing green shoots of things starting to trade.”

Rose said the amount of capital sitting on the sidelines to deploy once buildings start to trade is significant.

He also noted that some of the world’s largest commercial real estate companies, including Brookfield and Blackstone, have been walking away from some of their major investments while at the same time building war chests of “billions” of dollars to deploy when the capital markets open up again.

“The first interest rate cut sends this industry flying,” Rose predicted. “The pent-up demand, the amount of capital sitting on the sidelines, everybody’s waiting for the first interest rate cut to say, 'OK, it’s over.' ”

EDITOR'S NOTE: This article was updated with additional details following Avison Young's issuance of a press release about the transaction on Monday, Feb. 26.

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