UPDATED: Lone Star wins Project Royal

Lone Star has emerged as the winner of Lloyds Banking Group’s £900m Project Royal UK non performing loan portfolio, beating off from Cerberus Capital Management and Colony Capital, CoStar News can reveal.

Lloyds is understood to have confirmed the outcome to the three shortlisted finalists late last night.

CoStar News was first to break the story this morning.

Lone Star’s bid is backed by £300m of senior debt from Royal Bank of Canada and Citigroup, which are thought to be taking an equal share. The senior debt is priced at 600 bps over LIBOR, with the final discount thought to be close to 40%.

Lone Star’s bid is supported by its subsidiary Hudson Advisors, the loan servicer.

Cerberus, which fought Lone Star very close, had its £300m finance package underwritten by Goldman Sachs, which was understood to have lined up M&G Investments, AIG and JP Morgan to sell on the senior debt.

It is believed that AIG is considering buying some of the senior debt underwritten by Citigroup.

All parties declined to comment.

While contracts are yet to be signed, the near closure of one of the year’s highest profile loan portfolio sales, in deal which requires senior debt financing, is a huge fillip for both Lloyds and the market.

The three finalists were made to work in the final stage of the process. Each were required to agree sales documents, servicing arrangements as well as representations and warranties for each future property sale. The work involved cost each bidder several hundred thousand pounds, a source familiar with situation said.

Many of the loans in the Project Royal portfolio contain transfer restrictions. As a result, it was not possible for the deal to be ‘true sale’ from the outset as Lloyds is required to receive consent from the underlying borrowers, so the majority of the deal has been structured synthetically involving a total return swap between Lloyds and Lone Star, a source familiar with situation said.

The circa 35-strong non performing loan portfolio consists of £900m worth of debt secured by UK secondary office, retail and industrial commercial property independently valued at around £700m, which splits broadly three ways: a third of the portfolio is non-performing, defaulted loans; a third has matured and not repaid; and a third are performing loans.

The original portfolio was close to £1bn, but since the sales process was launched, £100m worth of loans repaid.

The average LTV across the portfolio is around 140%. The swap liabilities are minimal – estimated at around £30m – while only a small number of loans have so far gone down the LPA receiver route.

Lloyds is hoping to close the deal by the end of the year, so that it can report its continued increased pace of non-core commercial property disposals in time for its annual report next year.

The loan portfolio sits in the bank’s £23.6bn Corporate Real Estate Business Support Unit (CRE BSU), headed up by managing director Richard Dakin.


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