Merricks tips more debt into Sydney ‘Halo’ tower amid default
Private credit provider Merricks Capital has increased its loan by another $30 million to developer Milligan’s 55-storey office project in Sydney’s CBD, even though another lender has already issued a default against the development.
The stalled project has already cost Merricks’ flagship fund, which recorded its first monthly negative return in almost five years in December.
But the prominent non-bank lender is tipping more money into the 55-storey project on the corner of Hunter Street and Pitt Street in the hope that an institutional investor can be secured in the coming weeks.
The woes facing the proposed tower highlight the challenges to the booming private credit sector as developers grapple with the high cost of construction, tepid demand for office space and weak valuations for office buildings. The corporate regulator is increasing its scrutiny of the sector, warning there is trouble ahead and that investors could lose money.
Total debt held against the Milligan project could be more than the development is actually worth, according to a report for the second-ranked, smaller credit group, obtained by The Australian Financial Review.
“Given a recent increase to the senior lender facility and that the manager reasonably believes there has been a deterioration in the property value since facility close, in the manager’s reasonable opinion, the total debt on the property may exceed the property’s current value,” the second-ranked lenders’ report said.
Acquired by Phil King’s Regal Partners last year, Merricks had arranged a loan for the project worth about $465 million in early 2023.
Dubbed the Halo tower, developer Milligan amalgamated over 70 individual plots to create a super-site across a new metro station being built in the heart of the CBD. With part of its construction using timber, the 40,000 square metre proposal boasts of becoming the world’s tallest such hybrid office development.
But the project has stalled amid planning delays, doubts around its $1.8 billion valuation and the high cost of finance and construction. So far, Milligan has been unable to lock in a buyer and construction is yet to start.
ASX-listed developer Lendlease previously signed a non-binding agreement to acquire the project for $685 million by the end of last year, but the deal didn’t go ahead and Lendlease has declined to say if it is still interested.
Meanwhile, Merricks loan to the project had swelled to $507.6 million including interest and fees by January 31 this year, according to the secondary lenders’ report.
The debt top up from Merricks will help fund demolition at the site, which had been due to go ahead last year.
The senior loan was due to expire July last year and has been extended a second time to late November, in the hope progress at the site and interest rate cuts will make it easier to land a buyer.
“Over the past 12 months in the commercial property sector, especially the office sector, there have been industry-wide challenges driven by high-interest rates and construction cost escalation,” Merricks private credit head Dan O’Donoghue said.
“The recent cut to interest rates, capitalisation rates beginning to compress, combined with rent escalation in premium offices, has resulted in a number of institutional parties being interested.”
O’Donoghue said the project has attracted institutional investor interest, including from Japan and Singapore.
Singaporean asset management giant Keppel is among the interested parties while Japanese construction giant Kajima is in the running to be the project’s builder if a sale goes ahead, according to sources familiar with discussions but not permitted to speak publicly.
Secondary lenders call it quits
The project is available to prospective investors for between $500 million and $600 million, according to industry sources familiar with the development.
The increased commitment means Merricks could be owed more than $600 million on the project by November if a buyer is not found.
The secondary lenders, meanwhile, issued a default notice last week to Milligan on its $31 million loan. That group comprises more than 60 investors who sold their strata-held sites to Milligan in a deal involving vendor financing.
“The sponsor, who had guaranteed the facility, is expected to have very limited, if any capacity, to meet his obligations under the guarantee,” the second lenders’ report said.
“Given this information and the subordinated position of the facility, it is likely that most, if not all, of the balance due on the Facility will not be recovered.”
The secondary lenders’ default could have triggered a cross default for Merricks’ senior loan – allowing it to charge default interest as well as take potential enforcement action – but Merricks has waived those rights as it maintains its support for the project.
