Capita ‘lifts and drops’ BCMS into growing servicer division

Winning bid for Barclays’ ‘non-core’ unit boosts Capita’s loan servicing push, reports Lauren Parr

The churn in ownership of commercial mortgage servicing businesses continued last month when Barclays Capital agreed to sell its operation to Capita Asset Services. The FTSE 100 subsidiary beat Apollo, Situs, CB Richard Ellis Loan Servicing and Hatfield Philips to buy Barclays Capital Mortgage Servicing (BCMS), although its bid wasn’t the highest, which is believed to have come from Hatfield Philips. It is thought that Capita’s offer was somewhere in the middle of the £5.5m-£10m bidding range.

Capita approached Barclays Capital in October, before the bank launched a formal tender process for BCMS, dubbed ‘Project Hedgerow’. Exclusive talks between Barclays Capital and Capita began in February, leading to exchange three weeks later. “We’ve been looking at opportunities for the past 18 months; BCMS was just one that we’d been tracking,” says Robbie Hughes, head of Capita Asset Services. However, talks only kicked off when Barclays Capital deemed the business ‘non-core’.

BCMS was formed in December 2004 as a ‘captive’ servicer, to service loans made by Barclays Capital’s Eclipse securitisation conduit. The servicer made a £722,605 pretax profit in 2009, on revenue of £11.1m. But the bank, under new chief executive Bob Diamond, is cutting out low-growth businesses and a lack of new CMBS issues meant it did not expect significant future revenue growth, while revenue from existing loans would remain constant.

“[The sale] wasn’t just about trying to maximise value,” says Hughes. “These loans will still be associated with Barclays, so Barclays Capital wanted to make sure whoever they were sold to would maintain the quality of servicing. Commitment to the staff also played heavily in deciding who would be the winning bidder.”

Another source close to the deal added: “If you’re coming out of a UK bank, working for a private equity house like Apollo won’t  be your cup of tea. And unlike Hatfield Philips, Capita is a FTSE 100 company –  it’s in acquisition mode; it’s growing.” As well as the servicing rights on the £4bn, 100-loan European CMBS book, Hughes was attracted to the BCMS staff’s experience in primary and special servicing via Eclipse. “It is difficult to recruit seasoned servicing personnel, particularly with special servicing experience,” he notes.

BCMS co-head Gareth Allat (a specialist in special servicing) is expected to join Capita. His counterpart, Steve Northage, will remain at Barclays Capital to manage the balance-sheet portfolio, an area still considered ‘core’. Most of the 11 BCMS staff will join Capita’s 20-strong London office. Capita has a team of 75 in the UK, Ireland (home to the back and middle office teams, lead by Siobhan Farragher) and Germany. Jim O’Leary runs primary servicing; Andy Wilcox runs special servicing from London.

Seeking more “bolt-on” businesses

Hughes says further “bolt-ons” of existing businesses are part of Capita’s strategic plan. Capmark, bought in June 2009 for around £10m as a foray into CMBS special servicing, took five months to integrate but has grown rapidly, mainly thanks to Capita’s win of the mandate to act as master servicer for €73bn of mainly European loans held by Ireland’s National Asset Management Agency.

This means Capita is now Europe’s largest, independent, third-party mortgage servicer, with a €40bn loan portfolio and the NAMA contract. As “a reasonable amount” of the property backing BCMS’s portfolio is in Germany, Capita plans to add another to its team of five in Frankfurt, which is jointly overseen by O’Leary and Wilcox. It will also look to add three or four staff in Ireland.

The latest deal is therefore simpler than the Capmark one, which saw Capita acquire both CMBS and balance-sheet loans from Capmark’s book. “Capmark had a large US portfolio, serviced by its Irish operation,” Hughes says. “We bought the whole platform and wound down the US part.

“Having decided to enter this space, we want to build scale and be a market leader. The BCMS deal was perfect for us; it was a ‘lift and drop’ of a discrete business unit within a bank. We’re not taking any of their systems, purely the people and the portfolio.”

That said, Hughes would like to adopt some of BCMS’s business methods; for example, the discipline it imposes on borrowers in terms of quality and frequency of reporting. “We like the template they have created, but will look more broadly at practices from both businesses in the six- month integration period,” Hughes adds.

Capita will continue to seek more new, mainly European, servicing businesses in the next couple of years, including firms to take it into other asset classes, such as corporate or consumer credit servicing. Hughes also expects that the disappointed bidders will seek other opportunities. Private equity firms such as Apollo are expected to seek servicing platforms to support the real estate debt portfolios they have and will buy, and to provide a steady income stream.  Apollo recently recruited from Lone Star’s servicing business, Hudson Advisers.

CBRE was keen to buy BCMS and is likely to continue its search for a loan servicing business after its rumoured attempt to buy Hatfield Philips around 18 months ago. The latest servicing business thought to be up for sale is Morgan Stanley’s Italian acquisition, called Fonspa. “Probably a number of other captive servicers are having that conversation about what is ‘core’ to them now and what is ‘non-core’,” Hughes says. Capita will continue to have this dialogue with as many institutions as possible, to push that agenda along.