US private equity firms Blackstone and Lone Star are the final two in the race to secure the equity component for sale in the high profile RBS Project Isobel debt fund.
RBS: still deciding between Blackstone and Lone Star
The two firms were understood to have offered the most competitive bids and delivered the most compelling case in terms of their ability to handle loan workouts, which will be a key component in driving the performance of the loan portfolio.
Blackstone and Lone Star are in talks with RBS for a 25% equity stake in the fund, which houses a portfolio of 30 UK commercial property loans secured against secondary and tertiary assets.
RBS instructed the four shortlisted private equity bidders, which also included Starwood Capital and Westbrook Partners, to independently secure senior debt necessary to improve the internal rate of return for the fund, which is thought to be as low as 10-12%.
But this is likely just a base return, which the winning bidder will look to improve through a combination of loan workouts, active management of underlying assets, negotiations with existing borrowers and entering into loan-to-own arrangements, were the debt provider would take ownership of the property.
The winning bidders’ expertise in these areas is of considerable importance for RBS as the bank will retain 75% of the equity. The winner will also be mandated to help RBS sell down its exposure to other third parties.
With no limit on the numbers of individual financing options, each bidder submitted their proposals on June 7th with senior debt from at least two separate investment banks. RBS, however, requested that the banks did not talk to each other in their preparations of the debt finance proposals.
HSBC is understood to be behind two bids, Goldman Sachs was behind three bids and Citigroup was behind two bids of the four proposals. Each of the banks’ margins came in at between 400bps and 500bps over LIBOR.
It is understood that Morgan Stanley considered providing debt, but did not submit a term sheet, while JP Morgan and Bank of America Merrill Lynch also considered providing debt. Banks providing leverage for the fund was considered much more viable than RBS’ alternative financing strategy of seeking a AAA rating for the senior debt and looking to sell on the debt to CMBS bond investors.
The final discount on the £1.6bn face value of the loan is still unknown, with guidance remaining at around 30%. The bidders, the banks and the advisers all are unaware of when a final decision will be reached by RBS. “That’s the mystery,” a source said.
RBS declined to comment.
CoStar Finance 