In August, Merrill Lynch announced the sale of $30.6 billion of US CDOs to Lone Star funds for an average price of 22 cents on the dollar (see Banking: It’s time to sell off or shape up, Euromoney, September 2008). And just weeks later, the German government approved a sale of development bank KfW’s 90.8% stake in corporate lender IKB Deutsche Industriebank to Lone Star for an "adequate, positive purchase price". As part of the deal, Lone Star will assume €3.3 billion of IKB’s questionable loans, and KfW will take on the remaining €1.3 billion of the portfolio.
One source says that the price paid for IKB by Lone Star was in the low hundreds of million dollars, which makes the purchase a steal for the private equity firm. German finance minister Peer Steinbrueck had hoped for €800 million. Bruno Scherrer, head of European investments at Lone Star, said the decision by KfW to accept its offer was "a great success" for the firm, and reportedly estimates that it will take two years to work out the problem assets, leaving Lone Star with a solid German financial lender.
Criticism of the German government has been voiced by opposition parties who claim that, after more than €8 billion of rescue attempts, the government has now virtually given the bank away. IKB came close to insolvency after investing in securities related to the US sub-prime mortgage market. Officials at KfW and the German government argue that, above all, a collapse of IKB was prevented and the chapter had been closed.
Scherrer says that Lone Star will put IKB "back on a sustainable course of long-term value added" and strengthen the bank as "a leading provider of financial solutions for the German Mittelstand [small and medium-sized enterprises]".
Lone Star’s experience in picking up broken financials has enabled the firm to be the leader among only a handful of private equity firms comfortable with buying up distressed assets. In 2005, Lone Star bought German mortgage lender Allgemeine Hypothekenbank Rheinboden from Germany’s trade-union investment arm. Last month, it agreed to buy CIT Group’s home-lending unit for $1.5 billion and take on $4.4 billion of debt and other liabilities. In May the firm bought part of a Bear Stearns unit that made US mortgages through brokers for an undisclosed amount.
Private equity firm TPG has attempted to purchase distressed financial assets but recently pulled out of a deal to buy UK mortgage lender Bradford & Bingley after the bank’s assets were downgraded. KKR and Apollo have also been relatively quiet in buying up distressed financial assets.