Blackstone and Prudential’s £11.8 billion purchase of a loan portfolio demonstrates today’s demand for non-core but performing debt.
The UK government’s sale of loans relating to Bradford & Bingley, the defunct former building society turned bank, is another significant milestone in the deleveraging of the UK’s non-core debt pile left over from the financial crisis.
The government-mandated ‘bad bank’, UK Asset Resolution, sold two separate portfolios containing performing buy-to-let residential property loans to Blackstone and Prudential in a deal which was announced late last week for £11.8 billion. To quote the UKAR announcement, the price was at the “upper end” of expectations.
For UKAR, the sale of what was known as Project Ripon marked a successful conclusion to a sales process which aimed to recoup money owed to the UK taxpayer after Bradford & Bingley was bailed out in 2008.
For those with an interest in the European loan sales market, the Ripon deal also demonstrates that there is investor demand for large pools of performing real estate loans, and not just the bargain non-performing loans which have dominated market activity since 2011.
It is important to remember that what is known as Europe’s ‘non-core’ debt pile is not just distressed assets, but also plenty of performing debt which is held by institutions which have made strategic decisions to divest, including in some cases property lending exposure.
In a recent blog post, Richard Thompson, PwC’s global leader of its portfolio advisory group, estimated that around half of European loan assets identified as non-core are made up of performing loans. Consider that PwC estimates the overall debt pile to be €2.1 trillion.
Real estate is just an element of the total, with corporate, infrastructure and project finance, for instance, also featuring. Focussing just on real estate loan sales, a 2016 research piece by CBRE said that some 15 percent of 2014 and 16 percent of 2015 total loan sale activity represented either performing or a mixture of performing/NPL loan pools.
As lenders work their way through Europe’s non-core debt pile, performing loan portfolios are likely to grow in importance. When European banks and asset management agencies began deleveraging property debt in earnest from around 2011, NPLs were the obvious assets to package up into portfolios. US private equity firms snapped them up at steep discounts, applied their aggressive asset management techniques to them and typically made a tidy profit. Now, with the bulk of deleveraging completed in the core markets of the UK and Ireland, attention has turned in part to performing loans.
We have already seen major sales of performing property debt. In April 2015, Blackstone and Wells Fargo bought GE Capital’s real estate assets in a deal which saw Wells take on its UK mortgages. In September that year, Lone Star bought Aviva’s £2.7 billion face-value Project Churchill loan book for £2.25 billion. The shallow discount reflected the fact that around half of the portfolio was performing.
As deleveraging progresses across Europe, it is likely that we will see more large-scale performing loan books emerge as lenders face increasing regulatory pressure to shift assets off their books. German banks, for instance, have been reluctant to realise losses and they still have high pricing expectations for performing loan portfolios, although market watchers expect portfolios to come to market this year. In Italy, the government is providing guarantees to support the transfer of loans into securitisation vehicles and market players say sub-performing and performing debt is in the pipeline.
If the explosion of NPL sales from 2011 represented a delayed reaction by lenders to the global financial crisis and was an exercise in dumping toxic loans, the increasing activity in the performing loans sales sector represents a wider restructuring of Europe’s real estate lending landscape. Sales like Project Ripon show that private investors are keen to take on unwanted but otherwise healthy loans.