Secondary sales by foreign banks add to wave of domestic debt deals, reports Lauren Parr
Activity in Spain’s distressed debt market is picking up, representing 43% of total planned real estate loan sales by banks across Europe this year, according to Cushman & Wakefield. Foreign banks exiting the market have been a growing source of opportunities for loan buyers. Commerzbank’s Project Octopus sale last month – a €4.4bn Spanish loan book originated by Eurohypo – marks the biggest single chunk of commercial real estate debt to be traded so far.
A wave of secondary sales is also expected, following Lone Star’s purchase of the Octopus €1.4bn non-performing loan pool, financed by JPMorgan, which bought the performing part of the portfolio. It is understood that most of the loans have a 2017 maturity date, “making it
clear”, says Mario Verdyguer, head of Spain for European financial adviser CR Investment Management, “that Lone Star’s business plan will produce opportunities for lenders eager to restructure debt”.
In March, IBRC traded €281m of Spanish commercial real estate loans that formed part of its €9.3bn Project Stone loan book to Northwood Investors. Barclays is selling its entire banking business in Spain, as well as in Italy and Portugal, while Germany’s FMS is working out each of its
Spanish positions, totalling around €300m. Last November, Lloyds sold the €215m Alpha portfolio of Spanish loans to Cerberus.
big portfolios on the market
The market’s overall potential for nonperforming loan sales is significant and several large corporate real estate portfolios are on the market (see ‘Live Spanish loan transactions’ table, above). Banco Sabadell, Bankia and CaixaBank are selling €1.78bn of CRE loans combined.
More activity is expected to come from mid-sized Spanish banks and the country’s savings banks, which have raised money to meet their core capital targets and are now focused on digesting their toxic assets. As collateral prices recover they will speed up the cleaning of their balance sheets. “It’s all related to banks’ health” says Jose Navarro, Savills’ deputy managing director for Spain. “Balance sheets are healthier now, so banks can accept restructuring that incurs losses. Three years ago, they didn’t want to hear about that.”
Spanish bad bank SAREB’s output of asset sales is also expected to accelerate, further fuelling the market. The bank has developed internal infrastructure and strengthened its management that will help facilitate this. For example, it is in the process of replacing its servicing contractors by the end of September – a line of business Situs aims to tap into. Servicing is conducted by the banks that transferred assets into SAREB – or the parties their servicing platforms have since been sold to, which presents a potential conflict of interest, in that there is a financial incentive for them to carry on servicing the assets, rather than to sell them.
SAREB holds €106bn of nominal assets comprising residential properties and development and land loans as well as commercial property; 58% of the portfolio was residential when the loans were transferred. It was set up less than two years ago with the aim of restructuring and recapitalising Spain’s banking system. The average discount on loans transferred was 63%; almost all the portfolio is in Spain. One loan adviser says: “It’s still very early days. It’s all been about consolidation, how to manage and what needs to be sold in years one, two and three.” According to SAREB’s figures, in 2013 it sold €1.56bn of assets – roughly half property and half debt.
following NAMA ’s example
The bad bank was born three years after Ireland’s equivalent, NAMA, but looks on track to follow in its footsteps. When the Irish market improved and lots of buyers emerged, NAMA began clearing out its loans and assets. The same situation has begun to surface in Spain. In May, SAREB marketed Project Pamela, comprising €250m of commercial real estate loans. Its first real estate asset portfolio to be put on the wholesale market was Project Bull, 939 residential properties sold to Bayside Capital last August.
In between, it has traded various other packages of loans and assets, including the sale of the €100m Walls office and hotel loans portfolio in January to Deutsche Bank and Magic Real Estate. SAREB’s trades have opened a channel for international investors, who have rapidly
become comfortable with the market since last summer, when there was still talk of Spain quitting the Eurozone. They have been lining up since Q3 last year as more evidence emerged that Spain was bottoming out, and as they seek higher returns in more peripheral markets.
“Spain is ticking the boxes for being one of the markets with the best opportunities in the next 18-24 months,” says Verdyguer. “In an increasingly over-saturated equity market, debt deals will gain momentum in the coming months.” Cushman & Wakefield estimates that
there are about €2.2bn of commercial real estate loans in the market. US private equity and hedge fund investors spent last year snapping up loan servicing businesses in Spain ahead of an anticipated surge of activity (see table, below). The next step will be to feed these machines with further loans.
“For the past 12 to 18 months private equity has been attracted to servicing platforms, secured and unsecured consumer debt and corporate loans in Spain,” says Prasad Changanti, who is responsible for identifying Spanish opportunities for Situs. Housing underpins a lot of Spain’s
secured debt. Catalunya Banc is selling a residential mortgage book called Project Hercules, worth nearly €7bn. “This is going to be an important transaction due to its sheer volume,” Changanti says.
Spain’s economy has turned a corner, with 1.1% GDP growth forecast for 2014. Credit has also started to flow again from both Spanish and international banks. However, the main problem will continue to be unemployment, at a rate as high as 25%. For investors, a recovery in rents and consumer spending “is still a big bet”, says Savills’ Navarro.
That hasn’t stopped strong competition driving up pricing so that it can be a feat in itself to secure a transaction. “There is not enough available product – both assets and loans – currently for all the demand we see right now,” he adds. “It’s a matter of time,” says Federico Monterro, head of loan sales in EMEA Corporate Finance at Cushman & Wakefield. “Banks start with their best assets and move forward to all opportunities.”
Bayside Capital has found several ways to restructure deals in Spain, such as via a €20m mezzanine loan for the refinancing of Madrid’s Islazul shopping centre for Ivanhoe Cambridge and Grupo Lar, as well as the Project Bull residential properties and the Parque Ceuta shopping mall (see below). Ahmed Hamdani, the firm’s head of European real estate and asset-backed investments, says: “There’s still so much to do in Spain that you can find a spot. You have to be selective in finding opportunities.”
Bayside finds good offer at Andalusia mall
One early example of investors extracting opportunities through restructurings is Bayside Capital’s acquisition of the Parque Ceuta shopping centre in Andalusia in January, out of the Windermere VII securitisation, which was in liquidation. Ahmed Hamdani, Bayside’s head of real estate and assetbacked investments, says banks were not well provisioned in the past and asset values were low, but agrees that this is changing.
The Heron City retail and leisure complex in Madrid offers another CMBS restructuring opportunity. The asset is security for the last remaining loan in the White Tower 2007-1 CMBS, which has matured and is in default, and the plan is to unlock its potential ahead of a sale. Only a small section of Spanish assets were securitised, but “there’s still a lot to be done in Spain. Banks are not hiding anymore; they’re looking to move assets,” says Hamdani.
Situs expands servicing strategy with Spanish joint venture
Loan advisory firm Situs has formed a joint venture with debt collection group Lindorff to capitalise on the growth in loan deals in Spain’s non-performing debt market, as well as new loans to refinance portfolios. Situs Lindorff will provide underwriting and due diligence, loan servicing, loan monitoring and asset management services, plus advisory and work-out services for buyers of assets. The new company has carefully analysed the various streams of potential business.
“Loan advisory work for non-performing loan buyers is a big part of our strategy,” says Situs chief operating officer Bruce Nelson. Situs advised several of the unsuccessful bidders for Commerzbank’s Project Octopus, helping to establish the portfolio’s value and a business plan for the real estate — the area where its expertise lies.
Spain’s real estate debt market lacks liquidity, but there is demand for new origination. “All these non-performing loans will potentially come to the market and need to be refinanced,” Nelson says. “Part of our role will be to help originate debt for clients.” Lindorff country head David Perez will help oversee the joint venture alongside a new appointment for Situs. Lindorff already has 750 staff across Spain.
“Spain is a major European market and we consider it part of our long-term strategy that will transcend the current distressed market conditions,” says Nelson. “We intend to expand our geographic presence in southern Europe through this joint venture.” There is scope for acquisitions or additions to Situs’s European services. With troubled assets skewed towards residential “there’s an opportunity to asset manage such portfolios. There are a large number of them and they are not necessarily being bought by locals.”