DISTRESSED DEBT INVESTING
Lloyds portfolio deal accelerates US investor’s European debt buying strategy, writes Lauren Parr
CarVal Investors moved into the European property non-performing loan spotlight at the end of last year through its win of one part of Lloyds’ €2.2bn ‘Pittlane’ Irish loan portfolio.
The Cargill-founded alternative investment fund manager began buying loans in Europe back in 1994, but this was the first time CarVal’s name had cropped up alongside dominant loan buyers such as Apollo and Lone Star in a competitive bidding process for commercial property debt.
CarVal paid €95m for a €380m bundle of commercial and residential-backed non- performing loans, which Lloyds eventually siphoned off as Project Pittsburgh. Apollo bought the larger, €1.8bn part of the portfolio, called Project Lane, for €180m, after being pipped to the post by CarVal for the Pittsburgh sub-pool.
CarVal also fought off competition for Pittsburgh from Marathon Asset Management and a consortium of Kennedy Wilson, Deutsche Bank, Och-Ziff and Varde Partners, which put in a bid for the entire Pittlane portfolio.
A very competitive market
“These [auctions] are very competitive,” says CarVal’s James Sackett, who manages investments in commercial real estate, residential and consumer loan portfolios. “There is always pressure to get through the data, but in this instance the seller spent a lot of time getting the portfolio ready, which made the sale process run more smoothly.
“In this market, it is a good time to be a seller as there have been a few new entrants, which has created real pricing tension. We were keen because we’d identified Ireland as a core market for us and believed it was the right time to invest there.”
CarVal has since applied some gearing to the deal, with a US lender. “We decided to put some leverage on the portfolio, with a low single-digit all-in funding cost and a relatively modest advance rate,” Sackett says.
It chose Australian firm Pepper Asset Servicing as its loan servicing partner for the assets. Pepper, which co-invested €3m, is expanding in Ireland and bought GE Capital’s Irish residential mortgage book last year. Irish commercial real estate manager Arrow Asset Management completes the lineup.
“We didn’t do this deal to establish ourselves in Europe, as the UK and Ireland have been core markets to us for many years,” Sackett says. “Since 2010, CarVal has bought loan portfolios with a face value of more than $2bn and continues to seek more of these types of investments.”
As well as the Lloyds’ portfolio, CarVal bought a €220m commercial leasing portfolio, including vehicles, construction and office equipment from Lombard Ireland late last year.
“Granular residential and consumer portfolios comprise a lot of our background,” says Sackett. CarVal’s previous purchases also include a large performing and non- performing consumer loan portfolio from Citi Holdings’ Egg internet banking arm.
CarVal manages investments in these types of assets for its funds under management, including CVI Credit Value Fund I, which was raised in 2010 and has almost fully invested its $850m of equity.
Second Credit Value Fund targets $2bn
Late last year the firm announced a first closing of CVI Credit Value Fund II and expects a final closing this summer of more than $2bn in committed capital from institutions, including global pension funds, corporate pensions and family offices.
The fund pursues US and European opportunities arising from banks’ deleveraging. “Loan portfolios have been a big part of that; there aren’t a lot of hard assets,” says Sackett. “For instance, we acquired claims with Lehman Brothers’ debtors.”
The firm started in 1987 as part of giant US food and financial services corporation Cargill, which has revenue of $133bn. Until CarVal started raising third-party capital in 2007 for the credit side of business it was only investing Cargill’s capital. Cargill is still an active investor in the firm’s funds.
CarVal has always had an opportunistic approach and, like many US managers, now sees plenty of deals in Europe. The group is working on several UK and Irish deals, “a mix of small private transactions and larger portfolio trades,” Sackett says.
It is seeking performing and non-performing loans and its core strategy is to “buy actual loans from the bank itself, where we’re not acquiring property directly. We have a specific real estate business to invest directly in hard assets, led by Robert Balick in Europe, and we work closely to use our expertise across the different strategies.
“From a limited partner perspective we’re looking at a global remit and seeing where we can best deploy capital,” Sackett concludes. “The opportunity in Europe is extremely interesting. In fact, today a higher proportion of deals are being completed in Europe than in the US.”
Property forms one part of four-pronged investment attack
CarVal’s business has four prongs: corporate securities; special opportunities (including structured credit); real estate; and loan portfolios (see pie chart). It manages about $8bn of assets, of which $285m are commercial property loan portfolios (excluding direct real estate investments).
Sackett’s loan portfolios team is a joint desk with the structured credit/products team, which invests in securities such as RMBS and CMBS through its London office.
The structured products team is led by managing director Shane Huether. Kit Evans joined the London office as a director in 2011 to manage investments in European structured products.
Sackett is managing director of the loan portfolios team, working in Europe alongside Stuart Lammin, who joined from Cambridge Place in 2011. The global loan portfolios team is led by US-based senior managing directors Jody Gunderson and Seth Cohen.
The overall team consists of 12 investments professionals, four of them based in London. Sackett joined in 2009 from Saxon Consultancy, and previously spent 12 years with Barclays.
CarVal now has around 50 London staff, with two new recruits to the loan portfolios and structured products team this year. Robert Balick leads the European real estate business and manages equity real estate investments.
The real estate strategy is focused on the UK and France, with investments in several London offices and developments, including the 100,000 sq ft 100 Cheapside with Orion Capital Managers and Interchange Croydon, 182,000 sq ft of offices to be completed by the end of this year. With Chester Properties, CarVal owns four buildings at the Stockley Park business park near Heathrow Airport.
CarVal has been raising CVI Europe Real Estate Partners (CVI EREP), a programme for investing more in the UK and France, in which Cargill will be a significant investor alongside other capital providers.