Speedy work-outs are typical exercise for bad-loan buyers

Non-performing loan buyers can quickly turn around problem assets, reports Jane Roberts

Investors in non-performing loan portfolios don’t hang around. No sooner are acquisitions signed off than the story switches to the hard graft of working them out.

“We don’t care what we buy – we will price anything – and then we are motivated to work through the loans and get things done,” says one buyer. “That means putting assets on the market, either because we’ve foreclosed or before we foreclose, with the assistance of the borrower. The difference between us and banks is, in theory, nothing. The key thing is we have bought at a discount and are motivated to work fast.”

Ron Dickerman, president of Madison International, which makes secondary equity investments for Madison IV fund, says: “Lenders are a catalyst for a lot of recapitalisation, especially when your lender is a US private equity buyer.”

The teams behind their higher-profile colleagues sourcing the acquisitions and doing the due diligence on new deals are set up differently from buyer to buyer.

Lone Star, which has bought loans with a face value of £2.2bn from three banks in the past six months, owns asset manager and loan servicer Hudson Advisors, with teams in London and Germany, which includes a rated special servicer, set up to work out large numbers of small loans.

The special servicing arm was established three years ago, initially to deal with loans backing Titan Europe 2007-3, the securi-tised collateral backing Lone Star’s 2009 acquisition from Credit Suisse, its first big European soured loan acquisition this cycle.

When it assigned the company’s UK special servicing rating in March 2011, Fitch Ratings said Hudson “appeared to be taking a more active approach than some of its rated peers in working out problem loans, evidenced by shorter resolution timeframes and the work-out strategies employed”.

The Project Royal portfolio, which Lone Star bought from Lloyds last December at around a 35% discount to the £923m par value, was a classic Lone Star buy. The deal involved at least 200 loans on secondary UK properties, but all the value is said to have been in the top 20-40 loans. There were 70 small loans to one borrower, Staffordshire-based Pritchard Group.

Lone Star turns Royal assets

Lone Star turned some assets immediately; the White River Place shopping centre in St Austell was sold to debt adviser and asset manager Ellandi, a specialist in sniffing out distressed smaller malls and working with partners to improve their value.

One of the largest Royal assets, The Cube in Birmingham, is expected to be put up for sale through Savills very soon. The 500,000 sq ft block comprises offices, retail and leisure, a Conran restaurant and 240 flats.

Lone Star has also contracted to sell an 800,000 sq ft B&Q warehouse in Doncaster, to Blackstone. Hudson Advisers’ UK real estate head is Robert Calnan, an experienced investment agent who was a partner in Jones Lang LaSalle’s City office for many years.

Calnan deals with the more institutional property Lone Star acquires in Germany and  the UK. One of his deals is likely to have been the vacant Sugar Quay, put into administration after Irish borrower Pace Group failed to sell it at Lloyds’ behest last year, then sold out of Royal to luxury residen-tial specialists the Candy Brothers in March.

The assets backing the much smaller number of larger loans in Project Isobel are very different. RBS transferred the £1.4bn portfolio of 35 loans into a joint venture owned 25% by Blackstone, which runs the relatively small team working them out, who are employed by Blackstone Real Estate Debt Advisors.

BREDA is led by Doug Kirkman and Lorna Brown, who moved to the buy side from RBS where Brown was previously head of loan restructuring. Loan servicing is outsourced to CBRE Loan Servicing.

Many of the RBS loans are junior pieces or other participations in syndications, sale and leasebacks, or complex asset-backed  op-co/prop-co deals. They include deals involving car parks operator NCP, which was restructured last month; Toys R Us, which needs to be restructured; DFS furniture stores; Empire Cinemas; Barchester assisted-living care units;  and Pendragon car showrooms.

Both Lone Star and Blackstone are pursuing discounted price offers – sales where borrowers are offered the chance  to make an offer to pay back their debt to regain control of the assets, at perhaps 90p on the pound.

This is an option that a non-performing loan buyer can take after buying at a good discount, which was unlikely to have been possible for the bank.