Oaktree closes Lloyds’ Project Harrogate financed by JPMorgan

Oaktree Capital Management closed the purchase of the Project Harrogate defaulted UK loan portfolio with Lloyds Banking Group paying around £260m, Costar News understands.

Lloyds and Oaktree closed Project Harrogate yesterday.

CoStar News understands that JPMorgan’s provided Oaktree with a less than 18-month loan priced at around 600 basis points over three-month LIBOR – the virtual benchmark pricing for non-performing loan-on-loan financing.

JPMorgan was also mandated to manage the Harrogate sales process.

A sale at £260m reflects a blended discount of 58% on the 70-strong £625m nominally-valued Harrogate portfolio, which comprises slightly fewer than 60 distressed UK regional properties, in which the majority of the loans are past due in the midst of receivership, to varying extents.

The non-performing loan (NPL) portfolio comprises around 25 different borrowers and includes several B notes and capex facilities, which explains why there are more loans than underlying properties.

Oaktree’s bid is in partnership with Capital & Regional, who will provide asset management services for the underlying properties.

The four largest properties account for more than half of the value of the underlying portfolio, which are an office complex in Jersey and three distressed secondary regional shopping centres: Vancouver Quarter in King’s Lynn, Rushes in Loughborough and Kingsgate in Dunfermline.

Oaktree emerged as a shortlisted finalist on Project Harrogate in July, in a bid for which much of the individual loan due diligence was carried out by Deloitte, CoStar News understands.

All parties declined to comment.

The balance of the portfolio is much smaller loans, spread throughout the regions and small in loan and asset size.

Lloyds assembled Project Harrogate in the second quarter before bringing the portfolio to market in May, first revealed by CoStar News, in the bank’s successor UK loan portfolio to the £923m Project Royal which traded to Lone Star last December.

CoStar News subsequently wrote an analysis of the underlying portfolio.

For Lloyds, the net effect of the trade is likely to be neutral to positive with the reduction in the bank’s non-core risk weighted assets likely to prompt a modest uptick in the bank’s tier one capital ratio, the measure of reserve capital which banks are required to hold at a minimum ratio of 9% by the European banking Authority which became effective at the turn of the third quarter.

In June, CoStar News broke Kennedy Wilson and Deutsche Bank’s Irish loan portfolio win from Lloyds, the nominally-valued €360m Lloyds Banking Group’s Project Prince, which traded at 17 cents in the euro or an 83% discount.

Kennedy Wilson and Deutsche Bank joint bid is understood to have been mid £250m, while Cerberus Capital Management and Lone Star were out of the race early with slightly lower bids.

Cerberus tabled a cash bid but had supporting financing from Goldman Sachs and GE Capital Real Estate, while Kennedy Wilson’s joint bid was financed by equity partner Deutsche Bank. Lone Star had supporting finance by Citigroup and Royal Bank of Canada, the banks which supported both its Project Royal and Excalibur wins.

Citigroup and RBS were understood to have agreed an extension to Lone Star’s existing circa £300m Project Royal facility to finance its Harrogate bid.

Oaktree closed its fifth real estate opportunities fund earlier this year, the Oaktree Real Estate Opportunities Fund V (ROF V), at around $1.25bn, including $30m invested by senior management, as at the end of 2011.

Real estate investing was launched as a distinct strategy by Oaktree in 1994, in response to the significant opportunities in distressed real estate debt in the previous cycle.

Oaktree’s real estate team targets a diverse range of global investments, including direct property investments, investments in companies with extensive real estate assets, undervalued debt and equity securities and opportunities to develop and re-position properties in association with aligned, high-quality partners.

Ian Coull, the former Segro chief executive, joined Oaktree’s European real estate team as a senior advisor in April.

In the same month, on 12 April, Oaktree Capital Group, raised $380.2m in an initial public offering – around 27% less than the firm originally sought.

At the turn of the following month in the UK, Oaktree and Capital & Regional closed their joint venture acquisition of the Kingfisher Shopping Centre in Redditch for £130m from Scottish Widows Investment Partnership, revealed by CoStar News in mid-April, financed by a five-year £86m senior loan by Royal Bank of Scotland and Santander

Describing its investment philosophy and market timing, Oaktree writes on its website: “Because we do not believe in the predictive ability required to correctly time markets, we keep portfolios fully invested whenever attractively priced assets can be bought.

“Concern about the market climate may cause us to tilt toward more defensive investments, increase selectivity or act more deliberately, but we never move to raise cash.

“Clients hire us to invest in specific market niches, and we must never fail to do our job. Holding investments that decline in price is unpleasant, but missing out on returns because we failed to buy what we were hired to buy is inexcusable.”

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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