Wells Fargo, the largest commercial mortgage lender in the US, will complete the nine-month acquisition process of Eurohypo’s UK commercial property lending business in the coming weeks finally cementing market share in senior lending on this side of the Atlantic, in an ambition which dates back five years.
Commerzbank and Wells Fargo could complete the sale of the renamed Hypothekenbank Frankfurt’s UK senior lending platform and transfer of £2.7bn performing loans ahead of Germany’s second largest bank’s second quarter results in three weeks’ time, increasing Wells’ UK loan book by more than three-fold.
Chip Fedalen, executive vice president at Wells Fargo, explains the bank’s rationale for the acquisition.
“While we are quite interested in asset acquisitions, this for us, and perhaps uniquely for us, is much more than an asset acquisition,” he said.
“Assets, especially in the real estate space, last for a limited amount of time, they are non-recurring. We are all about relationships, because relationships are a recurring stream of business, if you service those relationships properly.”
Fedalen has overall responsibility for the UK commercial real estate operation, with Max Sinclair installed as the head of its London commercial real estate office, and Mike Acratopulo as head of origination, based at the old Eurohypo’s familiar 90 Long Acre offices in Covent Garden.
Wells Fargo’s acquisition of the old Eurohypo, essentially, imports existing relationships and a track record among exactly the client base which the US bank would have sought to cultivate organically had the opportunity to buy the Commerzbank’s UK property lending subsidiary never emerged.
Indeed, there was something fortuitous on all sides: a German parent who wanted an orderly permanent exit from the market; a subsidiary with a performing loan book, deep track record and established relationship network seeking a new home; and a new entrant with deep pockets which sought UK market share at virtually the same point in the cycle.
Timing is something that can make or break a deal of this size, in this case, it was evidently the former.
For Wells Fargo, the Eurohypo acquisition simply accelerated existing UK senior lending ambitions.
Already some parameters have emerged as to Wells Fargo and the old Eurohypo UK team’s business model.
As Fedalen explains it: “We have acquired a business with a developed and proven client base.
“It is a client base that we would have hoped to have developed over several years. There is a similarity in credit-focused culture as well.”
That client base is to lend conservatively across the spectrum of professional real estate investors – including REITs, property companies, open and closed-ended funds, private equity fund as well as insurance and pension fund investments.
But the ambitions and appetite stretch further, to one-day – market permitting – loans for new issuance CMBS, corporate bond book running mandates, corporate financing lines for real estate companies, as well as supporting trusted clients conservatively further up the risk-curve.
“We are going to look at the whole palate of products,” explains Fedalen.
Wells Fargo’s financing of Lone Star’s acquisition of the old Eurohypo impaired pool is a case in point.
The loan-on-loan financing for Lone Star is possibly the largest yet seen in Europe during this cycle – with the underlying collateral a combination of non-performing loans, sub-performing loans, and loans currently performing which could later become impaired.
Fedalen would not be drawn whether Wells plans to hold the loan entirely, or sell down partially, instead explaining: “Wells Fargo has about $1.4trn in assets, we have somewhere north of $130bn in real estate assets. We have a long history of being comfortable with real estate and real estate credit.
“We are the number one lender in the US. Our ability from the balance sheet perspective, to look at larger numbers, I think is there, our experience in real estate is there. So, we have the ability to do larger numbers.
“And we don’t originate any credit just for sale, in other words, we eat our own cooking.”
Fedalen said the integration of the two teams into one united Wells Fargo UK office is already well underway, but that it is premature to give lending targets for the second half of the year.
“We are not a company that sets arbitrary limits. We are looking for clients who are active, competent real estate professionals. They are less concerned about individual ticket sizes and more in respect of the overall volume of business. For us to be effective, they have to be in the market.
“Our value-add is going to be being a very predictable, and very sustainable, source of capital to our relationships through the cycles.
“We know what we can do today, but this is going to be an evolutionary process.”
Evolution of Wells’ UK lending ambitions
Wells Fargo acquired a European commercial real estate loan presence through its merger with Wachovia in 2009, principally comprised of German and UK loans.
The legacy German Wachovia loan book has dwindled to around €1bn, which will likely be run-off in the next 18 months, through loan maturities, loan sales, as well as asset and portfolio sales.
In the UK’s new merged business, Fedalen stressed loan origination, outside the bank’s home US market, is restricted to Canada and the UK.
Fedalen was clear that lending in Europe beyond the UK for Wells Fargo was a non-starter.
Wells’ returning appetite to lend in the UK began 18 months ago, with a focussed business plan to lend to US clients only in London, and on stabilised assets. Opportunities to follow US clients further into Europe emerged but were declined.
In the second half of last year, the London office pitched back to head office to broaden the senior lending business plan to encompass UK-based real estate investors, and free of the London-exclusive parameters.
Fedalen recalls: “We started widening the lens around the beginning of the fourth quarter last year, marked by beginning to call on UK-based clients.
“As part of that strategy we decided to deepen the team here, by bringing over some very seasoned mid and senior level originators, Colin Powell, Robert Maddox and Mike Marino.”
While Powell and Maddox joined last autumn, Marino decided to stay behind, purely for family reasons.
Then in November, Commerzbank had warmed to the possibility of a sale the Eurohypo UK business, and appointed Barclays Capital to an advisory mandate which included, but was not exclusive to, an end sale.
The story from here is now incredibly familiar to most.
By the time CoStar News broke the story that Wells and Lone Star were considered frontrunners in a race against Starwood Capital, supported in the end by JPMorgan instead of PIMCO, Commerzbank’s decision to sell, rather than run down, was clear.
For Commerzbank, the sale accelerates the planned rundown of its non-core assets and its permanent exit from European senior lending, reducing its risk-weighted assets (RWA) by €1.5bn and absorbing a €179m against its 2013 earnings spread over the second and third quarters.
“With this transaction, we are accepting a charge on earnings in 2013, to take out risk costs in the coming years,” said Commerzbank’s chief financial officer, Stephan Engels.
“The positive capital effect from the RWA reduction compensates largely the charge to the equity capital ratio. This portfolio sale is attractive from a risk perspective since we transfer future risk from our UK operating platform to the buyers.”
However, the sale of Eurohypo’s UK subsidiary is net neutral in respect of Commerzbank core tier one equity ratio.
The blended discount for the overall £4bn Eurohypo loan book – approximately comprised of £2.7bn of performing loans to Wells and £1.3bn of impaired loans to Lone Star – was 3.5%, according to Commerzbank, based on what the bank described a “fair valuation of portfolio”.
This implies either an independent or internal revaluation of the loans prior to the blended 3.5% discount.
The difference between the two reflecting Commerzbank’s write-downs on the sale of the Eurohypo UK loan book, which may or may not be revealed in the bank’s second quarter results in August.