Restructuring: KKR launches Pillarstone for European NPLs
RBS veteran hired to run innovative unit; Greece in frame after first deal in Italy.
Private equity firm KKR plans to build a pan-European operation out of its new restructuring platform, Pillarstone, and has hired John Davison as London-based chief executive and co-investor.
Europe needs solutions offered by companies like Pillarstone for the sake of its banks and its economy
Davison, previously global head of strategic investments at RBS, says Pillarstone is eminently suited to the banking environment in Europe, and that similar initiatives are likely to emerge.
His appointment comes after KKR’s credit arm agreed a restructuring deal with Italy’s two biggest banks in June. Intesa Sanpaolo and UniCredit are transferring six credit and equity positions totalling €1 billion to the platform.
US restructuring consultancy Alvarez & Marsal is involved as a preferred service provider to the scheme.
The idea is to create a specialist vehicle that can also provide the portfolio companies with new capital. But rather than being a straight buyout, with the sellers realising the losses up front, the banks will benefit from the upside.
“These are situations in which we want to stay with the client, where we think the company can recover and we are not ready to sell the loan at a discount,” says Giovanni Gilli, head of Intesa’s division for managing non-core assets, which it calls its Capital Light Bank.
KKR Credit and Davison are therefore putting up some of their own funds, but capital will, it is hoped, be returned to the banks as well, in what Davison describes as a complex waterfall structure whereby Intesa and UniCredit get almost all of the initial recovery, before a higher proportion accrues to Pillarstone as the value of the loan increases.
“Pillarstone provides banks with another tool when a borrower has a future, but requires an operational turnaround and perhaps additional capital,” says Davison. “It gives the bank a way to manage the debt in a capital efficient way, without losing the upside.”
Davison says the European Central Bank’s Asset Quality Review is pushing European banks to take the kind of action on non-performing loans that UK banks have had to take previously, thanks to initiatives like the Asset Protection Scheme.
With European banks still holding around €1.9 trillion of non-core and underperforming assets, including €1.2 billion in non-performing loans, he compares the impact of the AQR to “a tectonic plate moving the banks in one direction”.
The potential market is so big that Davison says Pillarstone could surpass €20 billion within three years, and he “would be disappointed” if the portfolio did not reach €5 billion in that period. Asked about potential partner banks outside Italy, he points first to Greece, which has says has “businesses with great potential”.
He further mentions central Europe, Germany and France (though he says business in the latter two may take longer to materialise). Pillarstone will soon employ 11 people in Italy, and Davison says it is recruiting in other European countries too.
“Europe needs solutions offered by companies like Pillarstone for the sake of its banks and its economy,” he says.
It is more attractive for banks to transfer loans to Pillarstone, rather than trying to manage them on their own, says Davison, as Basel III regulations ascribe a heavy capital cost to non-performing debt, and can impose costly charges once the debt is converted to equity.
“We will get better outcomes in any situation [than if the bank acted on its own] due to our expertise, the new capital we can put in, and our ability to manage control positions and influence the business,” he says.
Davison admits there are many troubled companies that Pillarstone will not touch. He says the scheme requires, first of all, that the business can be turned around. Secondly, some firms will be too small – he is only looking for companies that have at least €50 million in debt.
Also, Davison’s team must gain the governance rights to allow them to bring about the changes they want the company to make.
The private equity veteran says orchestrating rationalizations will be easier when multiple banks pool assets with Pillarstone. Indeed, in the case of the Italian portfolio, he says other banks that have lent to those businesses could transfer their exposures to Pillarstone too, and Pillarstone is in discussions to that effect.
“If we’re managing situations for a number of banks, and hold the majority of the debt on the table, we are in a position to affect change at company level, something that banks might not be able or willing to do,” he says.
He adds that Pillarstone is flexible, and could gain a management fee as a percentage of the recovery, or undertake an outright purchase of a loan portfolio. Moreover, he says the structure of any engagement could also change after inception, according to the bank’s capital and liquidity needs.
Gilli agrees that one advantage of Pillarstone is its unifying approach. “The banking system can convene in an aligned position,” he says. Like Davison, he says more debt from the bank could be transferred in this way. “We now have a well-defined and well-organised structure,” he says. “We have a lot of hopes for this scheme.”