Commerzbank’s decision to permanently cease European property lending through subsidiary Eurohypo, opens the possibility of a potential sale of the bank’s UK performing loan book.
While no decision has been taken by Commerzbank as to the nature and speed of the unwinding of Eurohypo’s €56bn European real estate loan book, all options are expected to be explored in the pursuit of an orderly exit from real estate finance.
Any partial UK loan book sale would likely see a migration of senior London staff.
Commerzbank is unlikely to ever sanction a disposal of any part its performing European loan book at significant discount. Therefore, any piecemeal sale of the UK or Continental loan would likely only ever happen if a loan book-building non-bank lender priced the discount narrowly.
Eurohypo’s London office manages €7bn (£5.6bn) of UK real estate loan commitments which, together with agency, loan servicing and capital market positions, takes the overall loan book managed out of London to around €15bn (£12bn), as at the end of 2011.
In the event of Commerzbank holding either all or the majority of the European loan book, an orderly unwinding is likely to take years, as one of the most famous brands in property lending converts to a bad bank, Hypothekenbank Frankfurt AG – the name of a defunct legacy Eurohypo subsidiary entity which once housed defaulted loans many years ago.
The practical reasoning is that Hypothekenbank retains a pfandbrief licence but essentially, for those with long memories, it is Eurohypo’s former bad bank moniker. In English, it simply translates to Mortgage Bank.
Eurohypo only issued a brief statement this afternoon, reinforcing the “all commitments will be honoured” message – as the bank did last November when Commerzbank suspended new lending.
The statement by the London office today said: “The winding up decision means that no new business lending will now take place.
“The decision will have no immediate effect on any existing UK business or clients. Contractual obligations and commitments will continue to be honoured and business in the UK will continue to be serviced with no changes. The UK book of business will be reduced in an orderly process and there is no defined timetable for this windup process.”
In a seemingly linguistic pincer movement, Martin Blessing, chairman of the Board of managing directors at Commerzbank denied that the decision to reverse the previously stated intent to return to new lending from July in the four designated core markets was, in fact, not a u-turn.
He told analysts earlier today: “This is not a u-turn, but an acceleration of our present course. At the end of March we had already decided to reduce the portfolios of Eurohypo by four-fifths.
“Since then the economic outlook and the situation on the financial markets have worsened. Furthermore, there are regulatory changes such as the high capital and the rising liquidity requirements under Basel III, and also for long-term financing.
“This all means that the business model in commercial real estate financing and ship financing is no longer attractive for us. We have by no means made light of the decision to reduce these areas. One thing was clear, however: a swift end to the euro crisis is not in sight. For this reason we have to further reduce risks in a consistent manner and focus on the business that is sustainably profitable.”
Commerzbank’s European macro view has certainly hardened in recent weeks. The ever-worsening eurozone debt crisis, increasing regulatory capital requirements as well as considerable remaining long-term uncertainties have combined to affect a deeply bearish outlook by Commerzbank on the risk-adjusted returns which can be derived from real estate senior debt.
Investment returns for senior debt are eroded to the point where the investment case is insufficiently attractive, relative to risk and uncertainty, Commerzbank is arguing.
This is despite generational high senior debt margins – the so-called “golden era” for senior debt lending –in relatively robust Western European economies, such as Germany and the UK.