Size and street cred count in landing loan-on-loan finance

DISTRESSED DEBT INVESTING

Banks favour big, established clients when funding distressed debt deals, reports Alex Catalano

Finding debt to finance the purchase of difficult loan portfolios is becoming slightly easier, but the appetite for this kind of lending is still very patchy.

“It’s a volatile environment,” says Richard Thompson, chairman of PwC’s European portfolio advisory group. For big players like Lone Star, Cerberus, Apollo and Fortress, who target big distressed debt deals, “it’s easy to fund non-performing loan portfolios today”, says one such buyer. They have the size, street cred and infrastructure to deal with the assets, plus relationships with lenders.

For example, Royal Bank of Canada and Citigroup have financed two chunky Lone Star purchases. Apollo has a history with Credit Suisse: the bank lent on its deeply discounted Project Lane acquisition late last year, but Apollo previously bought a $1.2bn portfolio of the bank’s distressed real estate loans in 2010. David Abrams, who runs Apollo’s European debt fund, previously headed Credit Suisse’s speciality finance investment business.

Lenders prepared to shoulder the risk can make good money; loan-on loan debt carries 500-700bps margins, with 50-60% loan-to- value levels. This is attracting new players like Goldman Sachs, Bank of America Merrill Lynch, JPMorgan and Nomura. Availability of finance from this growing lender group is fuelling sales. Their willingness to “do half… stimulates the number of bidders, [in turn] maximising pricing”, says Stephen Eighteen, former RBS head of non-core real estate.

Hence, there are fewer requirements for vendor finance. “Lloyds looked at supporting sales but the returns were not attractive enough because of other lenders such as JPMorgan and Morgan Stanley coming in,” says Berwin Leighton Paisner partner Paul Severs.

Banks have also been part of the buying team: Deutsche Bank was Kennedy Wilson’s partner on the Lloyd’s Project Forth deal and Bank of Ireland’s Byron sale. Wells Fargo is partnering Lone Star in talks to divvy up the Eurohypo UK loan book, as well as providing finance for Lone Star’s distressed slice of it.

But for smaller fry and smaller portfolios, it is not so easy. “A lot depends on the assets – there’s such variation,” Thompson notes. “The more stressed the pool, the tougher it is to find funding; there’s no running yield.”

Banks are still not usually prepared to lend on assets such as development land or empty offices; if these form a big slice of a portfolio, it will knock down the price a leveraged buyer can offer, or even make the deal unviable. The location of the assets is also a factor. “For now, loan-on-loan financing is limited to the UK, Ireland and Germany,” says Federico Montero of Cushman & Wakefield.

Stapled finance helped seal the deal for RBS and NAMA

The Project Isobel and Project Aspen deals, both involving stapled finance (see table below) are difficult to assess, because the vendors, RBS and NAMA, retained stakes in the portfolios.

RBS and NAMA are basically nationalised banks operating in a very politicised climate. So the suspicion is that neither deal could have been financed in the normal way – or not enough debt would have been available to achieve as high a price as was announced.

Those who worked on Isobel maintain that it was a brave step culturally for the bank to work with Blackstone. It took a long time and several incarnations, with RBS practically forced into vendor finance when the euro crisis blew up in mid 2011. But one adviser says the vendor finance “turned out to be smart” when the bank subsequently securitised £463m of the loan in Isobel Finance “at a very good price”.

 

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