Lloyds and Lone Star close Project Royal

Lloyds Banking Group and Lone Star finalised the £923m Project Royal UK secondary commercial property loan portfolio yesterday, taking just two weeks to close the deal.

Lone Star has confirmed that the entire loan portfolio has been transferred into its Real Estate Fund II, with senior debt financing its acquisition fully provided by Citigroup and Royal Bank of Canada.

The circa £923 nominally-valued loan portfolio was discounted by 40%, re-pricing the defaulted loan portfolio at £540m, financed by £300m of senior debt provided equally by the two banks at a 600 bps margin.

While the loan duration is flexible, the work out is thought to take three years and the banks are expecting the loan to be fully amortised by the end of 2014.

Given the attractive margin, and the absence of interest rate swap liabilities which complicated the closure of RBS and Blackstone’s Project Isobel portfolio, Citigroup and Royal Bank of Canada are yet to decide whether or not they want to syndicate the debt.

The banks have received several offers of interest, which potentially could result in a partial syndication in the New Year, while RBS is thought to be keen to offload its £550m Isobel vendor financing in 2012.

Unlike with RBS and Isobel, Lloyds have sold the entire portfolio to Lone Star and was not required to provide vendor financing.

Richard Dakin, managing director Lloyds’ Corporate Real Estate Business Support Unit (CRE BSU), said: “We have continued 2010’s momentum in deleveraging our corporate real estate loan book throughout 2011, despite what has been a significantly more challenging environment for property transactions.”

CoStar News was first to break the news of both deals closure.

Angus Dodd, managing director, UK Real Estate, at Lone Star Management Europe, advisor to the Lone Star Funds, said: “We are very pleased to have completed the acquisition in a timely manner and thank Lloyds for its support throughout the process.

“We are confident of the ability of the Lone Star Funds to deliver constructive solutions to banks and, as further de-leveraging takes place in the property sector, the Lone Star Funds are well-placed to invest in further opportunities as and when they arise.”

Hudson Advisors, a subsidiary of Lone Star, will provide the loan servicing and asset management for the portfolio.

The circa 35-strong predominantly non-performing loan portfolio is secured by UK secondary office, retail and industrial commercial property which is broadly split 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 loan portfolio – brought to the market by JP Morgan Cazenove around six months ago –was close to £1bn, but close to £100m worth of loans have 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.

The Project Royal loans were part of CRE BSU, which is now thought to hold around £22bn of loans that Lloyds will look to run off and sell over the coming years.

jwallace@costar.co.uk

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