OPPORTUNITIES IN GERMANY
Lloyds and RBS plan more sales, but German banks have little incentive to sell, reports Lauren Parr
In the next six months, expect to see banks sell a handful of chunky real estate loan and asset portfolios in Germany. By Cushman & Wakefield’s calculations, at least six deals are in the offing: three from Lloyds and Royal Bank of Scotland are already under way and three totalling €2.8bn should come to the market before the end of the year.
Lloyds’ adviser Deloitte began soft marketing a €1.5bn pan-European loan port- folio this month. There are 23 borrowers and 60% are loans against German property, Property Week reported. The rest are secured on assets in the Nordics, Spain, Belgium and the Netherlands. Not all the debt is non-performing – the portfolio includes a €235m loan to Invista European Real Estate Trust, secured on €335m of assets (see news).
Lloyds’ other German loan sale is also notable because the debt is not distressed. The UK bank is close to selling a senior position with a face value of around €450m in a larger, €1.1bn senior loan to Valad Europe. The slice being sold now is secured against 47 German office and industrial assets, in a process named Project Indie (see table).
RBS is selling €100m of real estate-owned retail property, part of the collateral to a €399m loan the bank made to Deutsche Land. RBS failed to agree a debt restructuring last year and took control of the assets. C&W is advising on the sale, which has been ongoing for more than six months but is now near to being closed.
International banks lead the charge
This activity shows that the story of the past couple of years has not changed: international banks continue to be the main sellers “because Germany is a non-core market for them; they’ve written down their portfolios closer to current market value than German banks have”, says Nick Colman, a KPMG director in its portfolio solutions group.
European banks have an estimated €30bn of German real estate exposure, calculates C&W, while a handful of US banks, such as Wells Fargo, have some residual exposure.
These banks plan to tap the huge demand for German product from private equity funds. “Plenty of hedge funds and private equity firms are buying IVG’s corporate debt, for example,” notes Federico Montero, a partner in the debt advisory arm of C&W’s EMEA corporate finance team. IVG, once Germany’s biggest quoted real estate stock, went into administration in August (see pp18-19).
“Banks tested loan sales in the UK and Ireland as the first market and saw a lot of appetite,” says one buy-side adviser. “They’ve done deals there and they have portfolios around Europe. Germany is quite big and they see demand for German product.”
Ireland’s bad bank NAMA is said to be looking at options for €1.6bn of German exposure “because it doesn’t want to be the last one in the queue to put product in the market”, he adds. It is offloading exposures “borrower by borrower”, observes one private equity investor. Irish bank IBRC is selling a handful of German loans as part of a €7.8bn, mainly UK, loan portfolio it plans to start selling in mid-October, called Project Rock.
RBS “still has a substantial pool in Germany”, one sell-side broker says. In 2010, the EBA stress test showed it had €5bn-6bn of German property exposure. RBS’s most recent German sale was Project Monsoon, 10 retail schemes with €331m of debt secured against them, which Cerberus bought at a discount believed to be 41% (see p24).
“RBS has been holding on to a lot of stuff, putting assets into its internal property asset manager West Register,” says the equity investor. Another asset manager adds: “RBS is managing individual assets and selling one by one – it has sold out of about 40% of its German book. Is it stuck with a rump?”
Société Générale is another foreign lender that has sold German assets, the broker says. Last year it sold two batches of French and German loans with a €1bn face value to Lone Star and AXA Real Estate respectively.
UK building society Nationwide is reviewing a €1.2bn German book but “doesn’t consider itself a distressed seller”, says a source. “It can’t take the losses. Its book is mainly performing and sub-performing; it would seek a 15-20% discount to the loans’ nominal value, as the lending is at rates below the market now, so there would have to be a discount for refinancing risk.”
German portfolio trades have been half the UK’s volume (and number) this year, C&W estimates. The €4.5bn of current and planned sales pale in comparison to the €15bn in Ireland, €14bn in the UK and €12bn in Spain.
German deleveraging still to come
“Deleveraging has not happened in the same way as in the UK,” notes the investor. “The last cycle was from 2003 to 2005, when Lone Star and Goldman Sachs bought lots of non-performing loans, but there hasn’t been much activity since; I don’t think it’s coming.” The broker adds: “The ones with lots of product, the German banks, won’t sell. Their focus is getting out of non-core markets.”
Rockspring partner Paul Hampton also doesn’t see “a tidal wave of bank-related portfolio deals hitting the public market”.
But investors can get their hands on German assets via debt in other ways. One is through an increasing number of distressed CMBS deals. Another is buying debt to get at underlying assets via corporate debt acquisitions in distressed companies.
Quoted IVG is the largest, highest-profile example of the latter to date, but such ‘loan- to-own’ strategies are not new: Starwood Capital is involved in a €500m joint acquisition with Brookfield Asset Management of the 10-asset Deutsche Interhotel group out of insolvency. It is taking part in a debt-for- equity swap via its acquisition of part of the defaulted senior loan, a position it acquired in 2009 from Lone Star.
Most German banks have quietly sold on positions in syndicated non-performing loans when they can, but smaller loan or asset sales are almost always under the radar.
US loan sales specialist DebtX advised a German mortgage bank on the sale of a €26m non-performing whole loan secured on two office buildings near Frankfurt, valued at €23m. It says the pool of buyers for European single loans or small portfolios is much deeper than for large ones.
German state-backed banks take DIY approach to loan work-outs
“German banks are not in selling mode; they’re staffed to manage things in house,” says one asset manager.
“German banks are frustrating; they don’t have to crystallise losses,” an investor adds. “Commerzbank, LBBW, Helaba and the like appear to have done nothing. Commerzbank has reported €22bn in intensive care for the past five years – what is it doing?”
The pressure is less because the German economy is relatively stable, interest rates low and if cash flow is coming in the banks can deleverage over time. “The German culture of managing business is different from Anglo Saxon banks,” adds the asset manager.
German banks believe they can work out loans themselves, rather than selling them at a discount to private equity firms.
FMS Wertmanagement, Hypo Real Estate’s bad bank, has eight years to work out its portfolio “so it’s not a distressed seller”, says one buy-side adviser. FMS has a €22bn global portfolio, including €10bn of non-performing commercial real estate loans but ‘only’ about €1bn is in Germany. It sold a real estate owned portfolio worth around €300m in Germany last June
to Cerberus: Project Rebound.
“FMS is mandated to not crystallise losses. It is funded by the German state so even if it’s got a sub-performing loan that’s paying interest it can be restructured so the borrower only has to pay 75bps over or even a small, flat amount. If the borrower refinanced elsewhere it would have to pay 250bps so the likes of FMS and [WestLB’s bad bank] EAA can still make money out of those loans; they receive 75bps when they funded at 25bps.”
Some local banks, such as HSH Nordbank and LBBW, are blocked from selling loans cheaply because they have government guarantees on parts of their portfolios. “A lot of assets in the ‘wrapper’ are commercial real estate loans,” says one broker.
“It’s difficult to sell if selling a loan means crystallising losses and the government has got to pay out, when the government is the reason these guys can fund themselves. It’s not a good commercial or political decision for them; there’s not much incentive to clean up their balance sheets.”