Whenever a state-owned company is privatised, pricing is always an issue and with it the nagging suspicion the taxpayer is being short-changed.
In the case of Germany’s HSH Nordbank, the emotions are a more complex mix of bitterness and relief. HSH’s owners – German states Hamburg and Schleswig-Holstein – have agreed the €1 billion sale of the bank to a consortium of US private equity firms led by Cerberus Capital Management and JC Flowers, marking the final stage of a lengthy financial restructuring that started with a €13 billion bailout by taxpayers in 2009.
HSH was on the brink of collapse during the financial crisis following an ill-fated growth strategy from 2003 to 2008 that turned it into one of the world’s largest shipping financiers with loans in that sector peaking at €44.6 billion.
So, though it has been hailed as the first successful privatisation of a state-owned Landesbank, it was a long time coming and, as it turned out, HSH only reached this agreement on 28 February, the last day of a European Commission deadline to privatise itself. The alternative was for HSH to be wound down.
The privatisation is due to be approved by all stakeholders after Real Estate Capital goes to press, but already there has been speculation in Germany of an IPO or some other form of exit by HSH’s new owners, which include US-based funds GoldenTree Asset Management and Centaurus Capital as minority investors.
Under the EC-approved restructuring of HSH, non-performing loans were separated from the core bank and these legacy assets – which had been halved to €6 billion during 2017 – will be carved out to a separate vehicle controlled by the consortium. The transfer of these NPLs will leave the privatised HSH with a clean slate, albeit the write-downs on their value will mean the bank posting “a loss in the three-digit millions for 2017”, it said in February.
Yet in April, local broadcaster NDR was still reporting “a bitter loss of billions for Schleswig-Holstein and Hamburg” – sentiment not helped by the fact JC Flowers was an HSH shareholder before the crisis. With such a chequered history, Stefan Ermisch, HSH’s chief executive, has indicated that a change of name for the bank is likely, as well as job cuts.
Despite the lingering scepticism, Ermisch maintains the Hamburg-based bank can grow in an extremely competitive German banking sector, partly because of its strong operational performance in commercial real estate under Peter Axmann, HSH’s head of real estate, and Michael Windoffer, until recently head of national business for the bank’s real estate division.
HSH is active across all real estate sectors, with a focus on northern Germany, and generated €4.7 billion of new loans in this sector in 2017. Infrastructure loans and renewable energy project financing are also growth areas, although they fall within HSH’s corporate division.
Unshackled by the EC restrictions in the run-up to privatisation, which kept HSH’s lending within Germany, real estate will now form part of an expansion across Europe. Real Estate Capital caught up with Windoffer (pictured), now head of cross border, to discuss HSH’s post-privatisation strategy.
Real Estate Capital: What’s your assessment of the bank’s growth prospects following privatisation?
Michael Windoffer: Maybe it’s not a completely different level, but privatisation will open new doors for us. We used to be a bank that was very active internationally. In the past, in the 2000s, we were active in the US, in many European countries, and to a small extent even in Asia. And we had to stop due to the restrictions agreed with the EU. For the last 10 years we were restricted to doing real estate business only in Germany.
We will be able to grow beyond Germany’s borders again; and want to expand international business carefully. In general, we will have capitally-strong owners which I expect to support the bank, understand the bank and push the bank forwards. From our point of view, it’s a very positive step and gives us a lot of security that we will be able to continue doing our business and expand it.
REC: How will real estate lending fit into the bank’s post-privatisation strategy?
MW: I wouldn’t say that due to privatisation real estate will become more important for the bank. There are a number of parts of the bank that will have more opportunities in a wider playing field. For example, we will expand our business in financing of SMEs, renewable energy and infrastructure beyond what we do today.
We have a growth case for real estate, and it might increase [as a proportion of the portfolio] a bit. But it’s not that we will be a real estate bank. The strategy is that we are a bank for the German Mittelstand [medium-sized enterprises] with a focus on corporate business, which includes asset-based financing of energy and infrastructure.
REC: Given that Germany remains your core market, do you have concerns over real estate pricing?
MW: We continue to see German real estate as very strong, which is not a surprise – many investors want to invest in German real estate because of the stable economy. But it would be naïve not to be concerned as we have seen price development and rent development, which is spectacular compared with the past in Germany. But we look carefully at the individual property, and in general we don’t think the market is overheated. There are exaggerations, of course, especially in the field of luxury residential. It wouldn’t surprise us if these prices come down and cool off a bit.
REC: How does HSH position itself in a highly competitive German real estate lending market?
MW: We are never price leaders. We don’t win deals by [under-]pricing. We are a relationship bank and are specialised in complex finance structures. We are very close with our clients, and we put a lot of effort into understanding our clients’ business plans. Often, our deals involve properties that need some attention, some revitalisation and re-positioning, which means there is a business plan behind it. We invest a lot to understand the business plan, maybe sharing the client’s view or maybe not doing the deal. But more often than not we find a structure that fits with the client and with our risk considerations.
We almost always deliver at the end of the credit process what we promised in the first indicative statement for the client of what we think about the transaction. I would say that’s what sets us apart in the German market – this combination of tailor-made solutions, speed, reliability and an entrepreneurial view of what the client does. And this helped us to generate €4.7 billion of new business last year and similar levels in the years before in a very competitive market.
REC: What is your policy on loan-to-value?
MW: The portfolio LTV is below 70 percent. However, LTV can be a misleading figure. Much more important for us is DSCR (debt service coverage ratio) because that will eventually decide whether a project fails or not. If we look at LTV, we also look at the exit LTV or more specifically at the euros per square metre at exit because that figure will eventually decide at what rent this property will have to be leased in the future.
It is up to us to find structures that make sense for the client, and if the client has certain requirements with regard to cashflow in certain time phases of the deal we might find a way to adjust amortisation to their needs.
REC: What is the rationale for expanding outside Germany?
MW: The markets in which we are active are pretty much exploited from our point of view. With the metropolitan areas, we intend to use especially Munich, Frankfurt and Dusseldorf as a base for expansion into surrounding areas. That wouldn’t offer tremendous growth, but some good potential. So, if we want to grow our business substantially we need to go beyond German borders.
We’re looking at what our clients are doing. A large number of our clients are active internationally, so they are the first natural choice to do business with abroad. The markets on our agenda as a priority are the UK, France, Benelux and Austria.
REC: Given Brexit, why the UK?
MW: We of course observe the Brexit situation carefully, but we want to be able to provide finance for UK properties. We don’t have a strong growth case for the UK, but if good opportunities came along we would be able to deliver on in the UK as well.
REC: HSH CEO Stefan Ermisch has talked in the German media about gaining “a foothold in real estate finance in attractive regions of Europe, albeit with caution and very strict risk controls”. Can you elaborate on this?
MW: We’re going to move very carefully, step by step, and the focus will be on as plain vanilla deals as possible, existing clients, some participation, and existing properties. And that’s different from what we do in Germany. Here we are deeply rooted in the market and we understand difficult property situations. In international markets, we have to continue to build up this know-how. We have started carefully, and we won’t compromise on risk.
REC: Given the track record of your new investors, even now there is speculation of an IPO or some other form of exit. Is this a help or hindrance to the bank?
MW: It’s far too early to talk about an exit. In real estate, we’ve been successful at least for the last six years in a very difficult environment. There was uncertainty about the future of the bank. We had high funding costs, so the odds were against us. We managed to be reasonably successful in that environment, and it’s our impression that things will get better in many respects. I expect privatisation to provide a tailwind and support.
I don’t want to speculate about the exit today; it is up to our new owners. We are looking forward now, and see that we’ve a good chance of continuing to do successful business.
REC: How do you see the bank’s market position in, say, five years’ time?
MW: We will still be a top-three bank in German commercial real estate finance. That will continue to be our main market, and we will have broadened our customer base further. We will have used our branches in Frankfurt, Munich, Stuttgart, Dusseldorf and Berlin to broaden the client base into the cities and areas around these metropolitan places. We will have realised the potential beyond northern Germany. We will still be a relationship bank, and we will still be the bank that wins deals via the virtues mentioned before, and not by being a cheap provider of credit.