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Colony Capital: German NPL sale is blueprint for speedy asset disposals

German banks club together to sell loans; looming losses from periphery could drive deals

The recent sale of a portfolio of non-performing real estate loans in Germany could mean eurozone banks are starting to clean up their balance sheets in the face of looming losses from the debt crisis. In early August a syndicate of four German banks – Eurohypo, Landesbank Hessen-Thuringen (Helaba), Berlin Hypo and Goldman Sachs-owned Archon Capital Bank – completed the sale of a real estate whole loan portfolio with a face value of €370 million to private equity buyer Colony Capital.

This is the firm’s fourth NPL portfolio transaction in Germany since 2009, but is unusual because the loans were all sold together as a package. The buyer was initially approached by one of the banks but was reluctant to consider a partial purchase. This bank subsequently negotiated with the others to sell the entire portfolio in one transaction.

"Banks tend to be more
inclined to take write-offs
on positions that they do
not control; this transaction
demonstrates that they can
get things sold if they all
work together"

-Dilip Awtani, Colony Capital 

“It is rare to find a transaction like this one as usually one or two members of a syndicate are reluctant to sell,” Dilip Awtani, managing director and head of European debt strategies at Los Angeles-based Colony Capital tells Euromoney. “Buying a piece of a syndication is less attractive to us as we would not have control of the investment and would end up in long debates about how to exit,” he adds.

Awtani reckons this is the first time such a trade has been completed in Europe.

He would not, however, be drawn on the banks’ motivation for selling the loans, but the presence of Helaba in the syndicate could indicate the pressure at least one of them is under to clean house.

The state-owned bank controversially pulled out of the European Banking Authority’s stress tests earlier this year after the authority refused to recognize German silent participation hybrid capital as contributing to its core tier-1 ratio.

“German banks and insurance companies are selling what they can to make space for the write-offs that will inevitably come from their exposures to the eurozone periphery,” says one observer.

These write-offs could come sooner rather than later as the situation in periphery states, particularly Greece, rapidly deteriorates.

Keep it simple

Clearly the fact that this is not a particularly large deal and that there were only four banks in the syndicate made the proposition relatively straightforward. In addition, all the loans in the portfolio were held by one borrower, they are the only loans related to the properties and there are no senior, pari passu or junior liens.

However, Awtani sees it as an encouraging sign that banks are becoming motivated to deal with their NPL exposure.

“Banks tend to be more inclined to take write-offs on positions that they do not control; this transaction demonstrates that they can get things sold if they all work together,” he says.

Experts believe there could be roughly €2 billion of German NPL deals in the pipeline, and Colony Capital sees continuing attraction in the asset class despite the turmoil in the debt markets.

“We have to price in the risk of any legislative change that could potentially defer collection or resolution of a loan or property,” Awtani explains. “But the macro environment is very low yielding and people are getting out of equities and into fixed income. Investing in bricks and mortar is seen by our borrowers and buyers as a defensive strategy that offers inflation and income protection.”

More on Colony Capital

Real estate: Colony corners FDIC fire sales

September 2011

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