Debt-defying buys

Heavy hitting buyers from abroad are taking us on and buying heavily discounted Irish loan books. Surveyor Margaret Kelleher, a director at Lisney Cork, looks at what’s been going on in the commercial loan market

This past year was a busy one for European debt sales, a year during which several high-profile transactions were completed. The European credit and sovereign crisis of the past few years have led to the imposition of a series of new regulatory requirements with the banks. These include Basel III (revised capital, liquidity, and leverage requirements) and the European Banking Authority’s measure to strengthen banks capital positions. As a result, European banks have had to deleverage and sell debt. In particular, they are endeavouring to sell debt relating to non-core markets. Consequently, non- and sub-performing real estate backed loans have been the primary focus.

Ireland is a relative newcomer to the debt sale market. To date, sales of real estate backed loans have included both performing and non-performing loans and are varied between residential and commercial property. Purchasers are generally private equity funds and other non-bank entities with a clear message that US buyers are here and transacting in multimillion-euro acquisitions. A number of transactions occurred in 2012 as a result of foreign banks trying to exit the Irish market. In August, a major US bank, GE Capital Woodchester Home Loans, sold its Irish residential mortgage business to Australian company Pepper Home Loans, which is backed by Goldman Sachs. The portfolio comprised 3,500 properties and it was reported that it was bought for approximately €0.40 in the euro, indicating its distressed state.

In addition, Lloyds Banking Group has been selling the loans of its former Irish holding, Bank of Scotland (Ireland). In June it sold “Project Prince” to Kennedy Wilson, a Californian investment company, and Deutsche Bank for a reported €61m, an 83% reduction on the €360m nominal value. In August Lloyds brought “Project Pittlane” to the market. This included two separate non-performing loan pools, Project Pittsburg and Project Lane, with reported nominal values of €350m and €1.8bn respectively.

We understand that these portfolios comprised 50 borrowers with 700 loans on 500 properties. Reports suggest that 90% of the assets were secured by Irish properties and the remaining 10% from the UK. There were a number of interested parties in the entire with a number of rounds of bids but eventually, the two portfolios were separated, with Apollo Global Management purchasing Project Lane for a reported €180m and CarVal Investors with Centrebridge Partners purchasing Project Pittsburg for a reported €35m, a 90% discount on both. CarVal is an independent subsidiary of the US Group Cargill and Centrebridge Partners is also a US private equity and credit investment company, while Apollo is an American private equity firm. More recently, Bank of America has been mooted as the purchaser of a €2bn IBRC loan portfolio.

Moving to domestic banks, AIB sold ‘Project Kildare’ during the year. We understand that this portfolio comprised 369 loans covering 457 Irish properties that included a mix of hotels, nightclubs, shopping centres, and offices. LoanStar, a US investment company that invests globally in distressed assets, was the purchaser, paying a reported figure of €260m for the portfolio, a 60% discount on the nominal value. During the summer AIB also put ‘Project Pivot’ to the market, which started as a €500m portfolio with 108 UK commercial property loans, However, it was later reduced in size due to the large discount being placed on the debt from potential purchasers. A smaller portfolio of some of the loans was later brought to the market. We understand that this deal is not now progressing.

In general, when loan portfolios are brought to the market they are bundled in lot sizes that will be market receptive and of a particular size to attract international bidders. They typically cover all property asset types with the exception of land. Preliminary information including the asset details and the borrower is provided in the first instance together with, in most cases, a valuation report (which may be historical) detailing an opinion of value of the property. Potential investors are asked to make an initial first-round bid on the property portfolio based on this information. Some bidders are eliminated at this stage and more detailed information and due diligence is then available on a confidential basis to the remaining declared bidders, including borrower details and the specific quantum of the debt. Another round of bids will take place, sometimes culminating in a best bids process wherein due diligence must be completed within a specific timeframe. The successful bidder will become the owner of the debt/loan and thereafter will interact with the borrower on an individual basis and either agree a workout strategy to enhance the asset and dispose of it at a future date, or alternatively to sell and offer to the market immediately as a real estate asset on individual basis.

Looking to 2013 the outlook is that Europe will continue to dominate debt sales activity. There will be further discounted loan sales from banks wishing to exit the Irish market and from domestic banks seeking to deleverage and reach targets set down by the Central Bank. Nama is expected to accelerate its disposal strategy throughout the year.


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