Scottish Widows is the latest insurer to begin investing in commercial mortgages to help fund its pension liabilities, Real Estate Capital can reveal.
The company has set up a lending structure with its parent, Lloyds Bank, to enter the fixed-rate, long-term lending market in the UK. It expects to make loans between £20m and £100m with seven to 30-year terms and loan-to-value ratios of up to 65%. Lloyds will act as an arranger and originator for Scottish Widows’ annuity fund.
The bank is thought to be targeting returns of around 200bps over the gilt. Lloyds lends on terms up to seven years so there will be no crossover with the lending it is doing for Widows.
The initiative was put together by the insurer’s investment propositions director, Gavin Stewart. There will be no single leader of the initiative at Lloyds, but its commercial real estate team’s six specialist heads, led by John Feeney, will each offer customers long-term, fixed-rate loans as an additional option.
The team will have its own servicer, with some staff transferred from the bank’s business support unit or “bad bank”, which is being wound down.
Stewart said: “This is an excellent partnership for us to deliver longer term funding for commercial real estate investment to the group’s existing commercial banking customers and new customers we might not previously have been able to target. It also reflects Scottish Widows commitment to invest long term UK infrastructure.
“Given Lloyd Banking Group’s unique position as both a bank and insurer we can provide affordable finance over the short and long term and investments of this nature are particularly attractive to Scottish Widows as they will help fund our pension liabilities.”
Feeney added: “This agreement means that our clients can access the full spectrum of real estate funding options through one interface and it enables us to target new clients with longer term funding needs. Clients will continue to interact with the same expert Lloyds Bank relationship teams while gaining access to additional longer term solutions.
“This deal is another string to our bow and a key differentiator for Lloyds Bank in what is an increasingly competitive debt market.”
As with most fixed-rate lending, deals will be subject to early pre-payment penalties, but Feeney said there would be “reasonable commercial flexibility for substitutions” in relation to pools of collateral held against the loans.
Scottish Widows is entering an increasingly crowded market where other pension funds and insurers, such as Aviva, Canada Life, Cornerstone, Legal & General, MetLife, Pricoa and Standard Life, are already active.