Bank of Cyprus’ inherited performing UK commercial and residential real estate loan book, dubbed Project Avenue, is an atypical property loan portfolio which is expected to draw interest from the UK’s challenger banks as well as mortgage REITs, private equity funds and hedge funds.
Project Avenue is the remaining property loan book from the UK branch of Laiki Bank, also known as Popular Savings Bank Limassol, which was absorbed into the Bank of Cyprus (BOC) in late March 2013 to protect against a disorderly bankruptcy after the European Central Bank (ECB) rescinded financial assistance to the failed bank.
Laiki Bank had been Cyprus’ second-largest bank before its ECB-mandated absorption into BOC once counting former Yugoslav president Slobodan Milosevic and his family among its clients as well as being popular with wealthy Russian entrepreneurs.
Credit lines for all legacy Laiki Bank property loans were suspended when BOC absorbed its liabilities, including working capital facilities. The inevitable result thereafter was for borrowers to be unable to make interest payments on their otherwise performing loans.
Project Avenue, which is being sold by HSBC, is comprised of 765 loans from 427 separate borrowers and more than 500 properties – split 59% residential and 41% commercial real estate – with an outstanding balance of £296.4m.
The unpaid balance is secured by more than 500 properties with a recent desktop real estate value of £626m, implying a modest weighted leverage of just 47.3%.
In addition, a combination of personal and corporate guarantees, including additional non-real estate asset pledges, takes the entire security against the £296.4m outstanding debt to £991m. Project Avenue’s total loan-to-security is just 29.9%.
The weighted average all-in interest rate across the granular loan pool is 5.4%. By geography, Project Avenue is 82% Greater London, 9% South East, 4% Midlands, 3% South West and 2% others.
There is evidently a lot of equity remaining in the granular loan pool which is expected to prompt a broader raft of bidders who could be interested in bulk acquiring client relationships for investors in high-end North London residential properties.
In addition to Lone Star and Blackstone, the latter likely through its Mortgage Trust, Project Avenue is expected to appeal to second-tier UK banks such as Aldermore and Shawbrook, all of whom could see the loan portfolio acquisition as a fast-track to book building low-leveraged property loans extended to wealthy individual borrowers.
Project Avenue is expected to trade close to par which leaves little mystery as to the final recovery which can be achieved: par.
The discount to the unpaid balance and the speed at which par recoveries could be collected are the variables for a private equity or hedge fund buyer. For mortgage REITs, the appeal in Project Avenue would be in the subsequent cherry-picked refinancings.
All parties declined to comment.