Have you noticed how the adjective ‘toxic’ is no longer constantly paired with the noun ‘debt’? With so little new lending around, we’ve gone from being poisoned by the stuff to starving from lack of it.
For a reminder of why debt was always toxic in 2008, see James Wallace’s article on Excalibur, the €3bn of property loans Lehman Brothers offloaded to the European Central Bank before it crashed.
The piece shows how the US investment bank worked every fee-generating angle possibly related to property lending. The giant collateralised debt obligation the ECB took on comprised unsold bilateral senior and mezzanine loans, development loans, B-notes, corporate loans, syndicated positions bought from other banks and lots of notes from Lehman’s CMBS programme.
A look at just a few of them gives an insight into the complexity behind the stories about the growing number of billion-pound loan portfolios for sale. Some of the underlying assets were good, but everything was geared to the hilt. Lehman never expected to hold the debt, so the more it could lend the more it could sell.
The highest-profile was the Coeur Défense Paris office complex bought by Lehman Brothers Real Estate Partners in 2007 for €2.1bn, with asset manager Atemi – in which Lehman had a 40% stake. It also arranged and underwrote the €1.63bn senior loan; syndicated half to Goldman Sachs; provided bridge equity; securitised the loan with Goldman; and advised on the hedging.
The ECB tightened up the eligibility rules on re-possessing CMBS after realising what it had acquired from Lehman, which borrowed €8.5bn this way. Three years ago the Bundesbank’s chances of salvaging the situation looked poor, but by 2010 the provision had fallen, to €2.2bn. Excalibur is the largest portfolio still to be sold, so the ongoing talks with preferred bidder Lone Star are key.