A £1.3bn Bank of Ireland loan portfolio was the debut European debt purchase for the US investor
US investor and asset manager Kennedy Wilson planted its flag in Europe last year, convinced that banking turmoil in the region meant plenty of long-term opportunities. Its signature deal was buying a £1.33bn ($1.8bn) portfolio of about 30 loans from Bank of Ireland, one of the three large loan portfolios traded in the last quarter of 2011.
The loans are good quality, reflected in the modest discount of around 20%. “It was a fair commercial trade for both buyer and seller,” says executive vice-chairwoman Mary Ricks, who has moved from California to London to drive the European expansion.
The acquisition was led by the US firm, which will also asset manage the portfolio, but there were at least four other equity investors, with Deutsche Bank taking the largest share. Kennedy Wilson and its client Fairfax Financial Holdings took 25% of the deal while JPMorgan and US hedge fund DK have a minority stake. Ricks says she cannot comment on the terms of the deal.
The Kennedy Wilson/Fairfax 25% equity slice was financed with £150m of debt from Deutsche Bank. After the deal was completed, Deutsche Bank sold its debt to M&G Investments, while the portfolio owners also agreed to sell six loans to M&G for £250m in a £400m overall deal with the insurer.
These loans are secured on offices in the City and Mayfair; London residential; retail in Dundee; and a high-street retail portfolio.
“Deutsche Bank and Kennedy Wilson asked us to participate,” says John Barakat, M&G Investments’ head of real estate finance. “They had made the commitment to Bank of Ireland and wanted to diversify. We said we could provide loan-on-loan finance but liked some of the loans; some were very high-quality, like the London offices.
“I think we are the first non-bank loan- on-loan finance provider. It was a very interesting deal for us and a lot of capital. Two or three of our senior fund clients and our junior debt fund participated. It shows that we are able to do very big deals.”
Ricks says this sub-portfolio was “well- performing, low-yield loans, perfect to hold to maturity. I’m open to trading every day. But more usually we tend to work with borrowers for the best resolution.”
This month, one large loan in the portfolio was pre-paid: a £100m facility to UNITE, which the student accommodation company refinanced a year early with Legal & General and through existing facilities.
An A to Z of loan options
Ricks describes the asset management of loans as an A to Z of options: “Some things pay off quickly, on others we get more involved and do whatever it takes to enforce.” There are some high loan-to-value positions in the Bank of Ireland portfolio, “so we may have to get a bit more creative”, she adds.
What loans have they seen since the Bank of Ireland deal? Ricks says that in the UK at least “we had expected to see a few more deals”. But she adds: “Ireland will be busy for the rest of the year and generally we have a very large pipeline of deals.” One is thought to be Lloyds’ €400m of Irish loans, Project Prince, where Kennedy Wilson is believed to be a first-round bidder. “Investors are getting more comfortable with Ireland’s sovereign risk. I think we will do a lot of trading there,” Ricks says.
Fairfax is keen to continue investing and likes Ireland. As well as the deal with Kennedy Wilson, the Toronto insurance group was a lead investor with Wilbur Ross in Bank of Ireland itself, alongside other international investors, who took a 35% stake from the government, for €1.1bn in total.
The Canadians invested a further €250m in a joint venture with Kennedy Wilson in March. The US firm is injecting a 10%, £25m, co-investment and will source and execute real estate assets and loans, initially in the UK and Ireland. A similar, $278m US partnership was recently fully invested.
But this is not likely to be the only source of capital keeping Ricks’ team busy. They are rumoured to have another very large single investor looking to invest well over €1bn. “We have a lower cost of capital” [than some competitors] she says. That can only be an advantage.
Plenty of different hats for a growing headcount to wear
Kennedy Wilson has been building up its European team, looking to repeat its early 1990s blueprint of expansion in Japan, where it bought distressed loans and grew from two to 100 people.
In June, before buying the Bank of Ireland loan portfolio, Kennedy Wilson acquired the Irish bank’s real estate investment management arm, adding $2.3bn of assets under management in about 20 European properties, and 14 staff. The company now has nine staff in London and 14 in Dublin.
With Ricks in London is Peter Hewetson, head of acquisitions; John Keegan; and a five-strong debt asset-management team led by former HSBC banker Ian Goldsworthy and Colm McCarthy. Peter Collins, formerly managing director of Bank of Ireland REIM, oversees the asset management portfolio from Dublin.
“At Kennedy Wilson everyone wears a lot of different hats,” Ricks says. “They might be making sure the pool is a good investment but everyone also looks for new opportunities all the time.” Keegan is a good example, working on asset management for the real estate investment manager and the loan portfolio, as well as on acquisitions.