Austrian club player seeks a bigger role at European level

The Austrian bank’s year-old real estate lending arm, a senior lender in a number of club deals,  is taking on more staff with a target of writing €800m of new loans this year, reports Lauren Parr

Bawag’s newly created commercial real estate lending arm is stepping into club deals – an area other banks have been forced to pull out of – and has €800m to allocate to new business this year, mainly in Western Europe.

Set up 12 months ago, the business has racked up a €500m commercial real estate loanbook. About half of this is second-hand loan purchases, the other half new loans – an area Jürgen Fenk, head of the business, is keen to ramp up, particularly in the UK.

“We’re hiring someone to focus on the UK, to be closer to the deals and market,” says Fenk. The recruit will be an originator based in Vienna with the rest of the seven- strong team, but will visit London regularly.

Bawag will expand its real estate team to 10 or 11 this year, including two analysts –one with a German background – and a portfolio manager to take on existing loans. The team – which includes ex Situs man Toby Sharp and Marie Fernandez, previously with HBOS and Hammerson – provides senior, stretched senior and junior debt, but not mezzanine finance, through relation-ships with key clients.

Everyone, including Fenk, works on deals, with at least two people involved in each deal. “Our capacity to do deals is limited not by capital but by number of people,” says Fenk. Bawag is funded by deposits from the group’s strong Austrian retail presence, so it is not dependent on pfandbrief. This allows it to be more opportunistic and to structure its deals from a risk/return profile. The group recently teamed up with Austrian Post to form joint branches across Austria, which will give it additional liquidity. This was one of the factors that attracted Fenk to join last August from Helaba, where he was head of real estate finance.

Entrepreneurial approach

“I was looking to be more entrepreneurial than I could be at Helaba, which is an active real estate lender but was not the cultural fit I had hoped to find,” he says. Before joining Helaba, Fenk spent four years as chief executive of Hypo Real Estate in New York, overseeing multi-billion dollar deals. He also launched and managed a publicly traded commercial mortgage REIT.

“[Bawag] is resource driven; we are building up our team but cannot be all over the place. It depends on where the deals are coming from and who has the relationships. The idea is to run the business from Vienna for now. We are not opening offices here, there and everywhere; as a lean, efficient, deal-focused business with no legacy portfolio, we can focus on new business.”

That business can be new bilateral loan originations, joining club deals, providing senior or junior debt, or buying notes from other banks, which Bawag has done recently. Unlike private equity players – including  its parent, Cerberus – it is avoiding sub- performing or non-performing loans. Cerberus, run by Ron Rawald, European head of real estate in London, is “looking for 20%-plus returns”, so it does not encroach on Bawag’s patch. “There aren’t many banks looking to buy performing loans from other banks; it’s a niche market,” says Fenk.

Among Bawag’s debt purchases are three loans that separate investment banks failed to securitise. One is backed by a Swiss office, another is secured by a mix of Spanish offices and retail, and the third is  secured by a single office in Germany. “We bought at a decent discount because [the loans] were eating into their returns. But they are actually very profitable and risk- cautious deals, with very good sponsors.”

The bank cherry-picks on a deal-by-deal basis and does not seek CMBS – just whole loans or participations in whole loans secured by mortgages. “Nothing really fancy,” as Fenk puts it. “We’re not buying portfolios, just individual deals. It’s our way of getting deals done, because not a lot of banks offloading assets want to be in the press, especially if they are in good shape; people will assume they’ve been forced to sell loans. We do it discreetly.” “Sometimes we may pick one or two loans we like from portfolios. We’re too small to allocate capital to portfolios, plus we don’t want to allocate capital just to loan purchas-es. We’re equally interested in originations.”

Bawag invests in all the main property sectors and will also look at hotels, healthcare or other operating real estate businesses, from a more conservative approach. Its focus is shifting from the secondary  to the primary market. “We’re focusing on providing bilateral loans, originating our own business and being an active member in club deals,” says Fenk.

He is known for pursuing a more entrepreneurial lending strategy and admits: “We’re probably more margin hungry than some of the traditional mortgage banks. We’re looking for yield, so our structures and durations are more flexible, but we prefer the three-to-seven-year range.” The bank is not as competitive on super prime deals, particularly in Germany and France, where margins have fallen below 200bps now that most traditional German lenders are focused on this type of deal.

“I see an opportunity for us to do deals outside this category and get higher spreads than others would be prepared to go to,” Fenk says. “But we’re not completely out of that box, acting as a hedge fund or invest-ment bank. We’re somewhere in the middle. “You won’t see us in deals such as the Deutsche Bank Tower financing, where margins are in double digits. We’re looking to allocate our capital in the most profitable way and for risk-adjusted returns.”

Playing in the senior market

In the UK, Fenk believes stabilising margins offer a good opportunity to work in the traditional senior lending market. “If you look at some current deals, margins for decent senior loans are 210-250bps, maybe a little less for super prime. It’s an area we can also play in, given our return target.”

Bawag’s edge comes from its willingness to take on the ‘racier’ deals now on offer in Europe; for example, structured portfolio  or pan-European deals in multiple jurisdictions, where some banks will not venture. Deals with a value-added angle can also offer the level of returns Bawag seeks.

“On a plain vanilla office deal, it’s hard to compete against pfandbrief banks,” says Fenk. “It’s not just the racy stuff. If we feel comfortable, we’ll look at simple loans where the underlying asset is not pfand-brief-eligible, so the competition is not aggressive.” One area that is strictly off limits, however, is construction lending. The refinancing of London office Alban Gate, part of the White Tower securitisation, is the one UK deal Bawag has been linked with. It was a mainly French club deal, but one French bank dropped out at a late stage and it is rumoured that Bawag stepped in.

Fenk says he cannot comment on this deal. However, he says he does anticipate finding new deals because the business is nimble and has no legacy loanbook. “We’ve proved we can be quick and still very diligent. We have a streamlined credit process so as we become more known in the market, we’re getting a lot of calls from other banks where clubs have fallen apart. This is happening now on one deal in Germany.”

The latest deal it has taken part in is a club that provided €308m to finance a 10-asset Central and Eastern European office and logistics portfolio for GLL’s Accession Fund, a client Fenk knows well. The arranger was Deutsche Pfandbriefbank and half of the  underwriting was provided by UniCredit Bank Austria. Bawag was a co-underwriter and took the smallest, €50m piece. The LTV ratio was between 60% and 70%. The deal reflects Bawag’s appetite for primary business in the €20m-€100m range, although it is not pursuing other deals in Central and Eastern Europe first and foremost.

Western Europe is the target

“The UK, France and Germany is where we’d like to put the majority of our capital,” says Fenk. “The rest can be allocated around Europe, including the CEE.” He adds: “We participated in this deal because it was one I knew before I joined Bawag; I had it on my desk at Helaba.”

Other deals include providing a loan secured against a Frankfurt office building, a Spanish sale and leaseback and two other French deals. It is also participating in a retail-backed German/Netherlands deal. Bawag’s new business allocation is not fixed in stone at €800m. On a three-year basis, it can exceed this if there are more deals to be done. While it has yet to make a big splash, the UK is firmly in its sights.

“If you start a new platform from scratch it is difficult to build up a diversified portfolio  from day one, in terms of geography, asset class and risk profile,” says Fenk. “On the other hand you have to be opportunistic; you can’t sit and wait to get a London deal, but we’d like to do more business there.”

Bawag branches out to boost profitability

Bawag’s commercial real estate lending business is the brainchild of Jürgen Fenk’s boss, chief investment officer Chris Brody, who joined from Cerberus when it bought Bawag in early 2008. Bawag’s management has changed since then and it has been recapitalised with new equity. When the crisis hit, Bawag also received capital from Austria’s government.  The bank’s total balance sheet is €38.6bn Cerberus is not Bawag’s sole shareholder (others include Generali) but leads the owning consortium.

Various business lines have been set up outside Austria to boost profitability, starting with a team that buys non-domestic corporate debt, another Brody-led initiative. With regards to replicating the model for commercial real estate, Brody argued “it would be a good time to enter the European market on an opportunistic basis, as at that time certain banks had decided to cut their real estate exposure, leaving certain markets or stopping lending entirely”, Fenk recalls. The platform’s first origination, executed by the corporate team prior to Fenk’s appointment, was its participation in a pan-European logistics deal for ProLogis  at the end of 2009. Fenk has been tasked with leading the charge subsequently.