Blackstone to capitalise on Spanish ‘bail-in’

Following Santander’s rescue of Banco Popular, its JV deal with Blackstone to tackle €30bn of distressed real estate assets could prove a success story for both the bank and the private equity real estate giant.

Following Santander’s rescue of Banco Popular, its JV deal with Blackstone to tackle €30bn of distressed real estate assets could prove a success story for both the bank and the private equity real estate giant.

Blackstone’s purchase of a majority stake in the property portfolio of Santander’s Banco Popular is a landmark deal in the clean-up of Spain’s distressed legacy real estate debt mountain.

It also represents a significant opportunity for the New York-based private equity real estate firm in a market on which it and its investor rivals are determined to capitalise.

For a purchase price understood to be about €5 billion, Blackstone has got its hands on a 51 percent stake in a portfolio of bank-owned properties with an original value of around €18 billion – as well as non-performing loans carrying a €12 billion face value.

The huge acquisition equals the total investment in Spain’s commercial real estate sector in H1 2017, which stood at $5.9 billion (€5 billion), according to figures from JLL.

With about €7 billion already invested in the country, Blackstone’s latest transaction further illustrates its active interest in the growing Spanish real estate market, which is benefitting from an encouraging economic climate as it recovers from the 2008 global financial crisis.

For its part, Santander, which bought Popular for a nominal €1 in June, has also positioned itself to take advantage of the clean-up of the distressed property portfolio. For a bank reducing its overall exposure to distressed property assets, Santander’s ‘bail-in’ of Popular demonstrates that Spain’s largest lender has faith in a domestic real property market that is picking up.

This is no straightforward NPL transaction. Rather than being a bank offloading legacy problems, Santander’s recent acquisition of Popular shows its intention to tackle the failing bank’s issues head-on. In keeping a 49 percent stake in the portfolio, Santander is targeting considerable upside.

The property loan and bank-owned assets are currently valued at €10 billion – a steep discount to their €30 billion gross book value. By moving the book off its balance sheet and into a JV entity, Santander also gets a 12 basis points boost to its core capital ratio. Finally, the bank can capitalise on Blackstone’s know-how in managing real estate to grow its value.

Loan sales structured as JVs are increasingly popular. Deals of this kind have been used in Italy – such as Intesa Sanpaolo’s ongoing Project REP and Unicredit’s Project Sandokan in 2015, which involved €1.35 billion and €1.2 billion of NPLs respectively.

However, the formula is not new. Indeed, it was Blackstone that entered into a JV arrangement with the UK’s Royal Bank of Scotland in 2011, in a deal which helped kick-start Europe’s real estate deleveraging following the global crisis. The so-called Project Isobel handed operational control of a £1.36 billion portfolio of NPLs to Blackstone, letting the bank retain ownership in accounting terms by holding three-quarters of the equity.

With Isobel, Blackstone took a punt on the UK property market’s recovery, just as it is doing with Spain’s in the Popular deal. A June 2017 report by CaixaBank showed that Spain’s GDP grew by 3.2 percent year-on-year between 2015 and 2016, with employment up 5.3 percent in 2016.

Prior to the Popular deal, the stand-out Spanish loan transaction was the sale of the €4.4 billion Project Octopus mix of performing loans and NPLs by Germany’s Commerzbank to Lone Star and JP Morgan in June 2014. It was reported this May that the last properties from the book were being marketed.

There remains €396 billion of NPLs in Spain and Italy, according to investment banking firm Evercore. Santander’s determination to take on Popular’s book and Blackstone’s eagerness to partner with it, are as good an indicator as you will see to suggest that southern Europe’s real estate NPL market is entering a critical period.