New berth and helmsman change Aviva’s debt course

Firm's new finance head reveals his expansion plans

New head Barry Fowler set to expand team and short-term lending, writes David Hatcher

REC 02.15 - 15With a commercial real estate lending book of £13bn built up over the past 20 years, Aviva Commercial Finance is a well-established heavyweight in the UK lending market.

But the institution has undergone a shake-up in recent months. The lending division was transferred from Aviva’s life business to its fund management business, Aviva Investors, at the start of last year. This coincided with the departure of veteran former Aviva Commercial Finance head Kevin Sale, who left after 43 years.

His replacement, Barry Fowler, the new managing director of commercial finance, appointed last June, plans to ratchet up its lending as opportunities grow, given the buoyant market and Aviva’s still-building (for the time being at least) annuity income.

This year the team expects to exceed the more than £1bn of deals completed in 2014. Fowler oversees the commercial and healthcare books, including social housing and project financing for public bodies.

In his first interview since taking the helm, the new lending chief and former Lloyds man reveals that large-scale recruitment, expansion into Europe and broadening Aviva’s short-dated offering are all on the cards for making this happen.

“We are looking to recruit in excess of 12 people, split broadly equally across the origination, relationship management and credit teams,” says Fowler. Headhunters are appointed and the expansion will include new heads of origination and credit.

“I expect most to be based in London. I’m not saying I wouldn’t employ more people in Norwich, where we have a great team, but it’s easier to bring in that skill-set, at the more senior level certainly, in London.”

The 85-strong Aviva Commercial Finance team was based in Norwich before its shift to Aviva Investors. The number of staff there is being reduced, with functions such as HR and marketing still part of the life business but the team’s broader support provided from Aviva Investors’ 1 Poultry City base.

Strengthening the team

REC 02.15 - p 15 table 1Aviva plans to add three or four recruits to origination manager Adrian Poole’s six-strong team and to win new customers. “Who we bring in will be determined by their borrower contacts and who they know in the market,” Fowler says. “ We’ll really try to use those appointments to broaden our overall capability, knowledge and relationships across the market.”

Fowler was previously Lloyds’ head of corporate real estate, with a focus on senior debt origination, joining Lloyds through its infamous 2009 merger with Bank of Scotland, where he had spent 18 years.

He says he has enjoyed the leap out of banking after two-and-a-half decades. “It’s a brilliant change culturally. That’s not to be negative in terms of the banking side – it’s quite Aviva specific. There has been a lot of leadership changes at Aviva since Euan Munro joined as chief executive [from Standard Life last January] and there is excitement that the business is growing.”

One change in Aviva’s real estate team is the departure of property head Ian Womack, who had been with Aviva for 30 years. Fowler reports to Mark Versey, head of client solutions at Aviva Investors.

Fowler plans for the new team to work not just on UK debt, which almost exclusively makes up Aviva’s current book, but to also originate deals in Europe.

Aviva France is in talks about allocating some of its investments into real estate debt through the team. The French arm has demonstrated its desire to invest in real estate debt, having handed an allocation to rival AXA to find it opportunities.

Fowler says: “They are keen to invest in commercial mortgages and that would give us a euro capability, so we’re in the formative stages of how we could take advantage of that opportunity, which I’m looking after.

“We would invest on behalf of that in-house client but could use those resources to seed a fund, bringing in third parties. It’s a very strong message for potential clients that we’ve got some of our skin in the game. It may not just be Aviva France either, it could be other entities within the group.”

Aviva capital has already invested in real estate debt alongside external capital, via its £500m Senior Debt Fund, run by James Tarry. The fund held a £287.5m second closing at the end of 2013 and a final closing is expected early this year.

 Diversifying the offer

By providing five-to-10-year loans with up to 65% loan-to-value ratios, the fund is part of a drive by Aviva to diversify away from only long-dated loans. “We’re offering mixed floating and fixed-rate facilities and that is very much part of how it’s evolving,” says Fowler. “The business is shaped by the annuity company mandate that dominates it, which has a lot of capital and capability.

“Not every borrower or property is suitable for long-dated, fixed-rate loans. I want us to be more relevant to more borrowers. We could look at mezzanine lending or a whole loan fund – there are advantages to both and nothing is ruled out.”

REC 02.15 - p 15 table 2Despite a desire to provide shorter-term deals, inevitably Aviva’s life mandate dominates its activities.

Aviva is trying to market long-dated loans to private rented sector investors and listed property companies, encouraging them to lock in today’s low rates. In December, Helical took £81m of 10-year money from Aviva, secured on two London office buildings and a retail park in Cardiff.

“Companies that hold crown jewel properties they will always want to hold can now arrange really accretive debt facilities,” Fowler says. “It’s a hassle to refinance every four or five years, and they have to report to the City their weighted average length of debt, and investors see that figure as being the longer the better. We are also offering substitutions and stapling debt to properties, where we can.”

Aviva has been active in project finance lending for quasi-public sector organisations with government-backed covenants. In December it issued three loans for the development of healthcare and education facilities totalling £154m. “We have quite a bit in the pipeline where clients are looking for significantly below 65% [leverage] and we can reward them for that,” Fowler says.

“I come from the banking world, where clearers are stuck in a slotting regime and below a certain level they have to hold the same proportion of capital as at a higher level. So they can’t usually reward borrowers for lower gearing, like we can.”

A further lending avenue this year will be refinancing assets sold from its “bad book”. As of 30 June 2014, £1.5bn of the £7.6bn of commercial loans on Aviva’s books were in arrears and it held £1.2bn of provisions against them. Although reticent to talk about its problem assets, the new lending team works closely with the deleveraging department, led by Fowler’s former Lloyds colleague Ewan Tocher.

Stapled finance sweetens deal

In December, Aviva sold the Bridgett portfolio,180 properties previously owned by businesses controlled by the Noé family, for £503m to Kennedy Wilson. Aviva provided £352.3m of stapled finance to sweeten the deal, with a fixed- and floating-rate loan structured in three tranches, with three, five and eight-year terms.

“Whether we will lend on an asset again will depend on why it’s gone into insolvency,” Fowler says. “Any lending must be underpinned by good cashflow and good quality assets, as with the Kennedy Wilson loan.

“If you think about the nature of liabilities on the annuity book, if we invest capital into an underlying asset and something happens, we need to reinvest that capital, as we need to continue to deliver cashflow.”

Whether Fowler can convince new borrowers of the advantages of long-dated lending will be crucial to Aviva’s success, as will its ability to broaden its client base by raising capital for shorter-dated lending. With a new head of lending, an infusion of recruits and growth of its London team in the pipeline, times are changing at Aviva.