Banks refuse to offer stapled finance for portfolio sales

BoAML report says practicalities of offloading debt are challenging

Société Générale is unlikely to offer stapled finance on its €500m French and German property loan portfolio, for which Blackstone, Lone Star and Deutsche Bank have been shortlisted.

Part of the bank’s €4.4bn commercial real estate loan book, its sale is expected to fetch around €250m and follows the suspension by SocGen of new property lending.

“It’s the first time we’ve seen Deutsche Bank try to buy new assets,” said a source, who added that as Deutsche had fully syndicated the debt finance it provided for Kennedy Wilson’s purchase of Bank of Ireland’s €1.3bn European loan portfolio, “maybe it sees some opportunities”.

CoStar reported that M&G Investments, GIC and GE Capital had taken the £350m of senior debt finance from Deutsche Bank secured on the former Bank of Ireland loans, at 500 basis points.

It is unclear whether Santander will pull off the sale of a €3bn package of Spanish loans called Project Escuderia to Morgan Stanley for €1.2bn, without vendor financing. Morgan Stanley’s bid equates to a 60% discount to par.

In order for a purchaser to achieve its equity target it can either pay less for the loans or use leverage. By offering vendor finance the selling bank is likely to attract higher bids, but it doesn’t help it to cut debt.

According to a research note by Bank of America Merrill Lynch, European CMBS 2012 Outlook and 2011 Review, there may be limited interest from banks to finance large non-performing loan purchases, given uncertainty around the value of the properties.

The report suggests that the presence of long-dated swaps could further exacerbate a mis-alignment of interests in joint venture arrangements between a buyer, which may want to recover its investment quickly via discounted loan sales, and a selling bank, which may prefer to pursue a longer-term strategy of asset management, if the latter retains the entire exposure to the senior ranking swap.

Ten of the 15 or so debt portfolios sold or put up for sale last year came out of RBS, Lloyds and NAMA or Irish banks – all of which have a mandate to sell assets fast. NAMA offers 70% stapled finance.

Despite pressure on more banks – such as Dexia, Credit Agricole and some German, Spanish and Italian banks – to raise capital, BAML said it expected many banks to avoid capital-destroying asset sales, choosing instead to deleverage by closing derivative positions, selling non-core businesses, or reducing new lending.