Why RBS judged Blackstone to be perfect suitor for Isobel

RBS chooses Blackstone as most aligned to its aims for future of debt fund, reports Lauren Parr

Blackstone’s win of a 25% equity stake in RBS’s £1.4bn Project Isobel debt fund, over rival bidder Lone Star, “wasn’t a pricing issue”, was the bank’s message to unsuccessful bidders. It came down to Blackstone being more closely aligned with the bank’s structural aims, even though it doesn’t have an in-house loan servicing capability.

The reason the deal took some time to close is partly a result of the fastidiousness of RBS’s advisers, Lazard and Berwin Leighton Paisner, in making sure the bank took the smallest absolute loss possible. Further to Blackstone’s advantage is thought to be support pledged by another limited partner. China’s sovereign wealth fund, China Investment Corporation, is understood to be a backer of the private equity group.

RBS has agreed heads of terms and exclusivity with Blackstone to manage the fund of 29 UK loans secured against secondary and tertiary assets, having cut the original book’s size by £200m after extracting one loan and selling some of the underlying assets.

Blackstone paid about £980m for its stake, representing a 30% discount to the portfolio’s face value. The package comprises whole loans and parts of syndicated loans, mostly performing, with loan-to-value ratios ranging from 80% to 90%.

Southern Cross care homes collateralise about £60m of loans in the portfolio, which is also thought to include car parks and car dealerships. Loans extended to Scottish companies during the height of the market are also believed to be part of the book.

More disposals to follow

As part of the deal, Blackstone will help RBS dispose of the 75% stake in the fund it still holds, over time. RBS hopes to sell the rest of the equity to investors such as institutions and pension funds, which have a lower cost of capital than opportunistic buyers. This would enable the bank to avoid taking the kind of large hit it would incur if it disposed of the loans at a distressed price all in one go.

RBS’s approach throughout the process  has reflected its determination not only to minimise its losses, but to keep its image intact, given its reliance on the taxpayer. Believed to be included among the bank’s prerequisites for a sale was the condition that any prospective buyer would not make quick or gargantuan returns through its equity purchase, for example by selling loans at a profit.

This is seen as one of the reasons why RBS eventually favoured Blackstone over other final bidders Lone Star, Starwood Capital and Westbrook Partners. “Blackstone is known to operate an operating company/property company structure, while Lone Star is renowned for its non-performing loan activity in Germany,” says one loan servicer.

Two years ago, Lone Star bought €2bn of property debt from Credit Suisse, for which it mandated its European mortgage servicing and advisory business, Hudson Advisors, to manage the loans. “RBS’s priority is to realise the least possible losses,” reiterates the servicer. In fact, the deal has been structured in such a way that will allow RBS to retain a share of future profits.

That is why choosing a bidder with a proven ability to work out loans was so important for the bank, because it will share in the upside.  To this end, RBS has agreed performance targets with Blackstone for recovery of the value of assets that underlie the loans.

The bank says the agreement will allow  it to benefit from both Blackstone’s asset management skills and market recovery, while at the same time reducing its exposure and risk. For Blackstone to make money from the deal it needs the loans to be repaid, so it has hired CB Richard Ellis Loan Servicing as primary servicer.

It now faces the task of securing around £600m of debt finance to improve the fund’s 10-12% internal rate of return, and is thought to favour a syndicated club deal, with the debt potentially being securitised in the capital markets later. During the bidding phase the deal attracted offers of debt at a cost ranging between 400 and 450 basis points over LIBOR, from investment banks including Goldman Sachs, Citigroup and HSBC.

Tapping renewed bank liquidity

RBS dropped the idea of providing finance for the transaction itself before selling it on to investors when banks began to return to lending, tapping into renewed liquidity in the market. Blackstone, meanwhile, will need to arrange hedging facilities for the debt it obtains, to protect against interest rate movements.

Although the deal doesn’t offer Blackstone massive potential returns, it is likely to have appealed to the investor because it promises to open doors to further loan disposals from RBS, as well as from other banks. “This could be the first of many deals coming out of RBS,” the source adds. “It could also be a blueprint for banks such as Lloyds to offload legacy loans.”

Michael Nash, chief investment officer  of Blackstone Real Estate Debt Strategies, acknowledges that the RBS deal “could serve as the model for future transactions as banks look to dispose of their non-core real estate assets”.

RBS had reduced its non-core property exposure by 38% to £38.7bn by the end of the first quarter of this year, from an initial £62.8bn. Last summer it sold almost £1bn of UK loans to buyers including AXA Real Estate. In March this year it sold a €286m portfolio of real estate loans and assets in Spain to Perella Weinberg. The bank is now understood to be selling a German loan portfolio.