Wells Fargo has teamed up with Lone Star to compete against Starwood Capital to acquire Eurohypo’s circa €5.2bn UK real estate loan book from Commerzbank, CoStar News understands.
The two prospective buyers are understood to be frontrunners in a sales process which began formally last autumn after the appointment of Barclays Capital, around three months after Commerzbank’s u-turn in June 2012 on its decision to allow Eurohypo to resume new property lending.
At the time, Commerzbank cited “continuing uncertain situation in financial markets, the heightening of the sovereign debt crisis and the increasing regulatory burdens” for its decision to exit property lending under the then-named Eurohypo.
A decision by Commerzbank is expected in the coming weeks.
Wells Fargo, the largest commercial real estate lender in the US, is understood to be interested in acquiring Eurohypo’s performing loan book, while global private equity firm Lone Star would seek to acquire the property lender’s sub-performing loan pool.
Eurohypo, which was renamed Hypothekenbank Frankfurt at the end of August last year as part of Commerzbank’s migration of the subsidiary to its non-core rundown, is understood to have a total of just under 100 UK commercial property loans, together valued at €5.2bn.
CoStar News understands around three-quarters of the loans are under 100% LTV, while they broadly range in size between €25m and €200m, with a few exceptions of even smaller syndicated positions and a small number of mezzanine loans.
With around 25 loans above 100% LTV, and a proportion between 85% and 100% LTV, the sub-performing pool could be as large as one-third of the total loan book, which is majority London-focused with a spread of regional lending.
Lone Star and Wells both purchased separate loan pools from the former Anglo Irish Bank’s $9.6bn US commercial real estate loan book in August 2011, in a loan portfolio sale by the de-leveraging bank which also included a loan pool acquisition by JPMorgan.
It is not known whether Starwood’s interest is for both categories of property loans, or just the sub-performing loan pool, which would trade for a high discount which could enable a higher exit internal rate of return (IRR).
Both Lone Star and Starwood have loan servicing platforms, in Hudson Advisors and Hatfield Philips, after the latter’s acquisition of LNR for $1bn, financed by Credit Suisse and Citigroup.
Wells Fargo, by contrast, is seeking to build a performing property loan book in the UK, after returning to property lending on this side of the Atlantic last year, initially a strict mandate to only follow the bank’s US clients in London with senior debt.
This mandate was deepened at the turn of the year, with the potential acquisition of Eurohypo’s performing loans likely a fit in respect of the kinds of lending Wells is looking to write in the UK: REITs, property companies, listed and unlisted funds investing in prime and the best secondary assets at up to 60% to 65% LTV.
Should Wells and Lone Star’s bid be successful, the portfolio sale could pave the way for a number of senior members of Eurohypo’s London team to move across to Wells Fargo as part of the deal, including Max Sinclair, head of the UK division, Michael Acratopoulo, head of UK origination and possibly Caroline Philips, head of debt capital markets.
The difficulty in securing a sale of the UK loan book has always been in the required discount that Commerzbank would have to accept from buyers on both the sub and performing pool.
Commerzbank, Germany’s largest bank which was bailed out by the European Union in 2008, would be reluctant to sanction at Board level a discount on a loan book which on holding until maturity would deliver a greater overall capital recovery.
Commerzbank, which also sanctioned an emergency rights issue in 2011, would find it difficult to justify accepting a discount on loan book to shareholders and politicians.
But the simple economics require a discount for a sale to be plausible.
Eurohypo’s circa 100-stong UK loan book is comprised of loans predominantly written since the global financial crisis – from the first half of 2008 until November 2011, when Commerzbank first suspended new property lending, with the expectation of several loan extensions which were subsequently approved.
In the subsequent near 18 months since Eurohypo has stopped writing new loans, property margins have spiked considerably, driven by the retreat of banks for property lending, as well as rising funding costs and increased capital adequacy requirement for lending.
As a result of these considerable market pressures, Eurohypo’s UK property loan book is likely to be considerably below where today’s margins are – at an estimate blended average of 150 basis points, compared to average pricing now for the same quality real estate backed loans of high 200s.
The proportion of mezzanine loans on Eurohypo’s book could, however, potentially increase this blended average.
Regardless, Commerzbank would have to accept a discount on both the performing loans as well as the sub performing loans – that is, those property loans in breach of their LTV and interest cover.
Such calculations will determine the price need to reset the performing loans to today’s margins, and the deeper discount for the sub-performing loans.
And in turn, Commerzbank will need to determine whether these discounts are justifiable to shareholders and Europe’s politicians and the German taxpayer.
Earlier in the sale process, a string of banks, private equity funds, pension funds, sovereign wealth funds and fund manager’s viewed Eurohypo’s loan book.
CoStar News understands these include AXA Real Estate, Schroders, Blackstone, Teachers Pension Fund, Canada Pension Plan Investment Board, Abu Dhabi Investment Authority, Legal & General Investment Management.
All parties declined to comment.