Inside Commerzbank’s €4.4bn ‘Project Octopus’ Eurohypo Spanish lending platform sale

Three joint ventures planning to bid on the tranched sale of Commerzbank’s Spanish commercial property lending business have emerged three weeks ahead of first round indicative offers for the €4.4bn loan book and platform in the process dubbed Project Octopus. 

Eurohypo logoCoStar News understands that Deutsche Bank and Blackstone; Apollo Global Management and Santander; and Kennedy Wilson and Varde Partners have all aligned, with many more partnerships still expected to form with private equity firms and investment banks all poring over the Project Octopus data room.

Allianz is still deliberating a bid with its subsidiary PIMCO, although the German insurance giant is far from a certain bidder at this stage.

The remaining prospective bidders are a mass of unaligned, but interested, performing, sub and non-performing bidders.

Cerberus, Starwood Capital, Lone Star, Fortress Investment Group, Orion Capital Managers and Oaktree Capital Management are all expected to bid across the sub and non-performing loan pools and are thought to be still in discussions with the various interested performing loan acquirers.

The prospective performing loan bidders include AXA REIM, Bank of America Merrill Lynch, JPMorgan and GE Capital Real Estate, CoStar News understands.

BAML and JPMorgan are also willing financiers of sub and non-performing loan acquirers, along with Citi, Credit Suisse, Nomura and Deutsche Bank, in the event that the latter German investment bank is unsuccessful as an equity bidder itself.

Crucial to bidders’ ability to maximise their return on acquired loans through to the post-transaction phase of servicing through to resolution will be for bidders to align with loan servicing specialists with Spanish offices.

Six Spanish loan servicing platforms sold last year, including two to Apollo, two to Kennedy Wilson and Varde Partners, and one each to Cerberus and TPG. Alongside these sold platforms are specialists with Spanish loan servicing credentials such as Hudson Advisors, owned by Lone Star, and CR Investment Management.

For CoStar News’ first detailed report on Project Octopus, please see here.

Project Octopus: the legacy Eurohypo lending business

The €4.4bn Project Octopus is comprised of two almost evenly-split pools – a €2.2bn performing and a similarly-sized sub/non-performing pool.

The performing sub-pool is split into two tranches, reflecting Commerzbank’s expectation of capital recovery for each and provisioning levels. There are also around €1.3bn in sub-performing loans and €0.9bn non-performing loans.

Across the entire €4.4bn commercial property loan book there are between 60 to 70 borrower connections, including Hines, Alpha Real Trust Limited and Spanish property developer Bami.

The weighted average senior loan margin is around 120 basis points over three-month Euribor, compared to conservatively leveraged senior margins of above 400 basis points on new Spanish prime senior loans today.

Project Octopus contains: a €50m legacy Eurohypo senior loan extended three years ago this week to finance Hines’ Zielo de Pozuelo shopping centre; part of a €75m three-bank seven-year syndicated loan to finance Alpha Real Trust’s €83.3m acquisition of the H20 shopping centre in April 2010. The centre was 86.7% occupied by rental value as at 30 September 2013.

In addition Eurohypo’s share of Spanish property developer Bami’s approximate €620m bank debt is also in Project Octopus.

Eurohypo, which Commerzbank subsequently named Hypothekenbank Frankfurt after the property lending subsidiary was permanently spun into its non-core division, is the main lender to Bami alongside Spain’s Banco Popular. Bami, which is 40% owned by Gecina, filed for insolvency proceedings last June.

Comparisons with Commerzbank’s UK £4bn Eurohypo sale

There are more differences than similarities between the sales of the two former Eurohypo subsidiaries.

Very few international lenders want to buy or build a senior lending franchise in Spain, compared to the returning appetite in the UK which has emerged over the 18 months prior to the UK business sale to Wells Fargo.

While Santander is understood to be a bidder for the performing loans with Apollo, the Spanish bank’s lending model was much more focused around corporate loans to property companies and developers than first mortgage secured senior lending.

Moreover, there is no “obvious” standout buyer for Eurohypo’s performing loan book, in the way Wells Fargo came to be viewed as such in the acquisition of the Eurohypo’s UK lending business, which is a function of where the Spanish property lending market still is relative to the rapid recovery experienced in the UK.

Commerzbank’s motivation for selling the €4.4bn Spanish lending platform is in part because it now represents the bank’s largest non-German CRE exposure following the sale of the £4bn UK book to Wells Fargo and Lone Star.

As at the end of last September, Commerzbank’s German CRE exposure was €19.6bn, followed by Spain’s €5.0bn, Italy’s €2.1bn; Portugal’s €1.7bn, USA’s €1.4bn, and €9.6bn spread across the rest of Europe.

Commerzbank’s Spanish loan book within the legacy Eurohypo property lending subsidiary was previously €5.1bn, prior to two corporate property loan sales agreed last year, which were only just announced last week.

A successful disposal of all four tranches of the Spanish book would “clarify” their Spanish risk, enabling the bank’s share price to appreciate significantly as a result.

But Commerzbank is unlikely to be a seller at any price and if bids come in for the four tranches at levels too far below provisioned levels, a sale would crystallise an unprovisioned loss which could result in only a partial sell-off of Project Octopus.

Furthermore, while Commerzbank’s Spanish portfolio is low-yielding, the bank’s German loans to SMEs are lower-yielding still.

Therefore, Commerzbank will need to re-invest proceeds at a lower return than the returns at which they are currently invested in within its Spanish CRE portfolio which will erode profitability.

Commerzbank is very conscious of this, particularly in light of Deutsche Bank’s profit warning last month.

Lazards is selling Project Octopus on behalf of Commerzbank.

All parties declined to comment.

About CoStar News

Finance Editor, CoStar News
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