European distressed sales ‘leave money on the table’ via large sales
Portfolio sizes restrict demand, smaller funds locked out
The recent assessment that almost €50 billion-worth of loan portfolios in Europe could be sold by the end of this year has focused attention on exactly who the buyers are for these assets. Progress by European banks in shedding non-performing assets has been painfully slow. The deals that have taken place have been large in size and targeted at a handful of buyers capable of buying up distressed debt in very large amounts.
The two most high-profile UK non-performing loan (NPL) sales have been Royal Bank of Scotland’s £1.4 billion Project Isobel sale to Blackstone, and Lloyds sale of a £923 million portfolio of loans to Lone Star last year via Project Royal.
In June it was reported that the shortlist for a further £625 million sale of NPLs from Lloyds, dubbed Project Harrogate, had been whittled down to Cerberus Capital Management, Lone Star and Kennedy Wilson/Deutsche Bank. The sale is being overseen by JPMorgan.
Another potential sale, Project Prince, will see the UK bank dispose of €360 million of Irish property loans – some of which are a legacy of its acquisition of HBOS – which could be sold for as little as 25% of their face value.
Another Irish lender, Allied Irish Bank, is hawking a £397 million portfolio of commercial property loans known as Project Pivot in a sale being managed by Citibank. It is also in the process of selling another €675 million portfolio – Project Kildare – via Morgan Stanley.
In Spain, Banco Santander recently cemented a €700 million sale of non-performing real-estate loans to Morgan Stanley after having failed to agree a sale on an initial €3 billion portfolio of assets that included both real estate and land. The portfolio is believed to have been sold at a 67.5% discount and is the second such sale by the bank this year.
Banco Bilbao Vizcaya Argentaria is now looking for bids on five separate portfolios of real estate and loans.
|Buyers look for smaller deals|
|Percentage of investors reporting absolute transaction amount|
Sales of this size are the preserve of the very large buyer. Indeed, in a recent survey of European distressed loan investors published by loan sale adviser DebtX, respondents complained that financial institutions selling distressed debt appear willing to sell only to the largest institutional investors. “The European distressed market is perceived by some as an ‘invitation only’ market favouring the very largest private equity funds,” the report – which polled 50 firms managing €150 billion – declared.
Of the funds polled by DebtX, 60% were seeking to invest in opportunities requiring less than €100 million commitment and only 12% said they had the resources to bid on deals requiring commitment of than €250 million.
The report claimed that the structure of the Project Isobel sale precluded all but the very largest funds from participating.
By limiting potential buyers to a small clique of names – Fortress, Cerberus, Lone Star, Blackstone, TPG and Apollo being the most common – are the banks getting the best bids possible for their loans?
Gifford West, head of International at DebtX in Boston, does not think so. “The reason banks undertake large sales is to raise funds – not to maximize proceeds,” he tells Euromoney. ”The strategic goal of large sales is to show the banks are making progress.” The structural complexity and long-term swap arrangements in place on many deals automatically limits potential buyers to a small universe of very sophisticated investors. But by concentrating on such large flagship deals, banks are probably leaving quite a lot of money on the table. Interestingly, Lone Star has quickly sold on a £44.6 million Project Royal loan backing a town-centre retail development in Cornwall to Curzon Capital Partners and Ellandi – a vehicle established by ex-Deutsche Bank real-estate specialist Morgan Garfield – reportedly at a healthy premium to the price it paid to Lloyds in December.
The DebtX survey finds that strong demand exists for assets of all sizes but investors want a more open and fair bidding process. Many grumbled they had conducted lengthy due diligence that was essentially wasted because their bids were not given serious consideration. They had concerns about “last looks” – whereby rivals get sight of competitors’ bids – and a lack of uniform due-diligence material.
West at DebtX argues this situation is hindering bank deleveraging in Europe. “In the US there are probably 70 to 100 loan sales per quarter. In comparison, we are seeing fewer than five successful sales a quarter across the whole of Europe,” says West. “There is unmet demand from smaller funds that raised money in the belief that the banks would sell loans.”
The report states that in the US the Federal Deposit Insurance Corporation has demonstrated that greater liquidity can be achieved through multiple loan sales of moderately sized transactions rather than large but infrequent sales – although it does not have the kind of jurisdictional issues to contend with that Europe does. “Liquidity will build liquidity,” the report says, adding that pricing might initially be lower than anticipated but by following through on sales, European banks will establish themselves as proven sellers and build a price floor for further sales.
“In the German market in 2001 to 2002 there was an overhang of non-performing loans relating to reunification,” West explains. “There were two €1bn transactions then banks quickly realized that they could sell smaller pieces and bring in more sales. We were doing 10 to15 transactions a year at the peak and brought a lot of buyers into the market.“
"You have economies of scale and costs of complexity. If you adopt a standardized process with a standardized agreement, it is much cheaper – you move from an M&A model to a standardized flow model and the process is much quicker.”