Eurohypo UK loan book sale: chronology of an unlikely £4bn trade

Commerzbank is targeting an end of the second quarter closing for the sale of the £4bn UK Eurohypo commercial property loan book to Wells Fargo and Lone Star, accelerating the permanent senior debt lending retreat of Germany’s second largest bank.

Wells-Fargo-LogoThe circa 70-strong UK loan book of Hypothekenbank Frankfurt, renamed from Eurohypo, will trade to Wells and Lone Star respectively in line with the declining performing status of the remaining loans, capping long-running talks which date back to last year – well before a rapacious media-interest ever got close to unravelling the highly-discreet talks.

Indeed, the original competing tickets – Wells Fargo and Lone Star versus PIMCO and Starwood Capital – changed unexpectedly at the very 11th hour before final bids were submitted to Commerzbank over the weekend of April 13 and 14.

There still remains no official confirmation from any of the parties involved, including from Commerzbank.

However, CoStar News now understands that PIMCO pulled out of lodging a bid hours before the final deadline, prompting JPMorgan – which was originally brought in by Starwood to finance the private equity firm’s impaired sub-pool purchase – to seize the opportunity to bid for the performing majority sub-pool as well.

CoStar News understands that JPMorgan’s pricing was marginally superior to Wells – that is, shallower single-digits – but overall Lone Star’s discount on the impaired sub-pool was more attractive to Commerzbank than Starwood’s, leaving the combined Wells and Lone Star ticket overall superior.

Why PIMCO pulled out at such a late stage in proceedings remains unclear, but it is thought to have been a decision taken at the global bond investor’s Newport Beach headquarters in the US.

Understanding Commerzbank’s motives

As to the motives of Commerzbank – which has always publicly appeared motivated to minimise the losses on the run down of its legacy exposures, particularly in tandem with a further €2.5bn rights issue just five weeks ago – until the German bank formally announces the deal, those watching from the side-lines can but make educated guesses.

A combination of increasing political pressure from the German government and the European Union to de-leverage, together with the heightened operational risk which comes with declaring yourself out of such a personnel-dependent business line, could well have been the deciding factors.

In simpler words: when you say you are out, it is better to just get out.

Furthermore, politically, it is likely to be much more palatable for the German investment bank to make opportunistic trades and crystallise losses outside of their domestic market.

On which basis, equivalent portfolio trades – along performing and impaired sub-pools – for the remaining Continental European property loan books is likely now on the cards.

According to Commerzbank’s 2012 annual results, the legacy commercial real estate loan book – on an exposure at default basis – comprised: Germany, at €22.1bn; Spain, at €3.6bn; France, at €3.3bn; Italy, at €2.2bn; Portugal, at €1.9bn; US, at €1.7bn; Poland, at €1.2bn; and the rest of Europe, at €5.9bn.

With Spain, Italy and Portugal’s real estate loan books likely to require discounts too steep for Commerzbank to absorb, the logical next trade is France’s €3.3bn.

This deliberately excluded its “home markets” of Germany and Poland, which would be too sensitive to sell politically, while the US book, for which Blackstone has already made portfolio purchases, is understood to include a significant proportion of impaired loans and would, therefore, also require too steep a discount.

Completing the integration and the CMBS loan servicing function

In somewhat of an unintended harbinger, CoStar News reported in mid January that Wells Fargo’s recently deepened UK senior debt lending ambitions had the potential to match the departing Commerzbank subsidiary in what this News Service headlined: Wells Fargo deepens UK senior lending ambitions to fill Eurohypo-like void.

One month later, Wells Fargo’s Mike Marino reversed his decision to relocate to London, to head up the bank’s UK senior lending drive.

And yet still the penny did not finally drop until another two months later, on the first day at MIPIM, when CoStar News was first to reveal Wells Fargo’s true ambitions.

Relying on the end of the second-quarter timing for the closure and the final transfer of the loan books to Wells and Lone Star, the decisions left to be taken are who moves, and in what capacity, and who does not.

Eurohypo’s senior management team has been out of new lending since November 2011 – which will be more than 18 months by the time they could be ready to start writing new business again in the third quarter this year.

Decisions are still to be taken on the make-up of the London office’s senior management team, but the US banking giant’s plans are thought to extend to the legacy debt capital markets and loan servicing division, which is expected to move across to Wells Fargo when this giant, and somewhat unlikely, deal finally closes.

All parties involved were unable to comment.

About CoStar News

Finance Editor, CoStar News
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One Response to Eurohypo UK loan book sale: chronology of an unlikely £4bn trade

  1. Pingback: Bids in last night for Britannica Fund’s circa £200m ‘Project Panther’ | CoStar Finance

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