Lone Star pays near £2.25bn for Project Churchill financed by Citi and Morgan Stanley

Lone Star has paid approaching £2.25bn for one of the last major UK real estate loan portfolios, Aviva’s Project Churchill, secured by more than 1,000 commercial properties nationwide, edging out Apollo Global Management.

Lone Star logo - newProject Churchill’s total unpaid principal balance (UPB) is approximately £2.7bn, while the carrying property portfolio valuation is £2.4bn, reflecting a sub 17% discount to unpaid balance and circa 6% discount to real estate value.  Valuations were conducted in separate pools by DTZ, CBRE and JLL and dated to March 2015.

Lone Star’s price paid falls exactly within the price range for Churchill reported by CoStar News two months ago, in a report on the initial three-strong finalists.  The deal to confirm Lone Star as preferred bidder is expected to sign this lunchtime.

Citi and Morgan Stanley will jointly provide an equal share of the loan-on-loan financing. Lone Star is expected to seek in excess of 65% loan-to-cost (LTC) this would imply a debt facility of £1.5bn or above.    

Binding bids were submitted on the evening of Monday 24 August – dubbed China’s ‘Black Monday’ following a dramatic 8.5% one-day collapse in the Shanghai Composite Index sending the world’s financial markets into a tailspin. 

The initial final three bidders – which also included Cerberus Capital Management – had all locked down their financing the previous week.  However, the impact of the day’s dramatic share sell-off, in which billions were wiped off the value of listed companies worldwide, understandably put banks into an immediate risk-off mode.

The banks seeking to finance the final two Project Churchill bidders – after Cerberus fell out of the race – were now operating in a palpably risker environment which put upward pressure on margins.

Consequently, Citi and Morgan Stanley sought a higher loan margin than recent comparables would suggest – at least above 350 basis points over three-month LIBOR, CoStar News understands.

Standard market flex terms are understood to have also been agreed to aid with the distribution of the loan-on-loan facility.

Apollo’s financier was JPMorgan. Markets have since stabilised but macro volatility remains an ever-present backdrop.

This context, however, did little to affect the competing equity price offers from Lone Star and Apollo for Project Churchill, with the underbidder’s price believed to be close behind. Both private equity firms were eager to secure probably the last UK sub and non-performing loan portfolio of this size.

For Aviva, the priority was always to find a single buyer for all four tranches of Project Churchill which narrowed the likely contenders to an obvious few from the start. The vast majority of the NPL portfolio is in three of the four tranches:

  • Tranche A: the high-yielding performing loan tranche with an UPB of £1.17bn, secured by 483 properties valued at £1.29bn;
  • Tranche B: a £527.9m non and sub-performing loan pool advanced to 25 separate borrowers and secured by 209 properties valued at £459.7m; and
  • Tranche C: an entirely defaulted tranche with an UPB of £913.6m advanced to 47 borrowers and secured by 305 commercial properties valued at £594m.

The underlying 1,020-strong property portfolio spans distribution warehouses, care homes, department stores, multi-let retail, office and industrial properties, shopping centres, a Rolls Royce depot as well as central London and regional office centres.

For a more in depth overview of Project Churchill, please see the previous story by CoStar News here.

Deloitte sold Project Churchill on behalf of Aviva.

All parties declined to comment.

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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