Apollo Global Management, the US opportunity fund manager, is expected to complete its circa €400m purchase of Westdeutsche ImmobilienBank, the German property lending bank, within weeks.
The sale by West LB, the German government-owned bank which owns WestImmo, will transfer a commercial property loan book of around €12bn to €15bn, comprising predominantly performing loans and a smaller non-performing loan portfolio secured against a diverse mix of European and US property.
Apollo has two strategic options with its acquisition of WestImmo: the first is to buy the bank’s loan book at a discount to book value, break it up and sell the loans on – piecemeal – at a premium to the negotiated discount, although in the current market Apollo would be unable to sell on even the performing loans at par.
The second strategy, which Apollo is expected to adopt, is to run the bank as an ongoing European commercial property lender, which will require sustainable, long-term funding. WestImmo is a pfandbrief-funded bank, which allows it to lend against commercial property and sell on its loans as pfandbrief bonds, similar to the covered bond market in the UK, to recycle its capital.
Apollo recruited Bernd Knobloch, former CEO and chairman of the board of managing directors of Eurohypo and member of the supervisory board of Hypo Real Estate, now Deutsche Pfandbriefbank, in autumn 2009 and has been advising Apollo on its WestImmo acquisition since the US opportunity fund manager’s interest has been firm which was when the sale process was launched in February 2010.
The day-to-day management will likely continue under current WestImmo chief executive, known as speaker of the board, Peter Knopp, while Knobloch is expected to get a role on the superadvisory board, under Apollo’s ownership. Apollo’s MD for Germany, Manfred Puffer, a former West LB board member, has led the acquisition of WestImmo.
Knobloch and Puffer have worked closely on assessing the viability of WestImmo’s ability to use the pfandbrief market as a continued funding source.
“Pfandbrief bonds are secured obligations. Investors should be confident on the quality of the assets in the covered pool and also the strict process in terms of eligibility and leverage of the underlying loans securing the pfandbrief,” explained one expert.
When the ownership of WestImmo is transferred to Apollo, Europe’s rating agencies will review their ratings of WestImmo on a stand-alone basis; that is, when it returns to private ownership and outside the guarantee of West LB group.
West LB hived off €77bn of commercial property loans into a “bad bank” in June 2010, which WestImmo’s rating subsequently benefits from. Apollo will have to inject equity into WestImmo’s balance sheet to reach an adequate rating to maintain its ability to issue pfandbrief bonds.
“The question is what will be the standalone rating of WestImmo; sufficient to be able to issue AAA/Aaa pfandbrief? While pfandbrief are secured obligations with a defined pool of collateral, rating agencies are more and more focusing on support rating and rating of the issuing bank,” continued the expert.
But there is precedent for this. US private equity firm, Lone Star, acquired Corealcredit Bank, formerly Allgemeine Hypothekenbank Rheinboden, through its Lone Star Fund 5 German Investments fund in late 2005, completing on January 2, 2006.
Lone Star, which now 100% owns Corealcredit Bank, has completed an extensive restructuring programme with new management and has refocused its lending solely on commercial real estate lending in Germany and has subsequently issued pdandbrief bonds.
“There should be investors in new pfandbrief paper by WestImmo under Apollo, but the pricing will most likely reflect the loss of direct government backing.”
West LB was forced to sell WestImmo, by the European Commission, after it requested €5.4bn in emergency funding in October 2008 to shore up its balance sheet. West LB subsequently appealed to the EC against its required sale of WestImmo in autumn 2010, which was immediately rejected, with the EC ordering West LB to implement a full scale sale by February 15 and propose a wholesale restructuring of West LB, which the EC is now considering.
West LB attempted to reduce the size of the performing loans sold onto Apollo, importing some loans onto its own balance sheet, although West LB has only had modest success at this. This jostling between West LB and Apollo is thought to be behind the delayed final acquisition by Apollo.
Apollo Global Management declined to comment.
CoStar Finance 