The non-performing loans market is one of the most complex and largest sub-sectors of the European real estate sector.
The acquisition of loans, often packaged into tranches worth several billion euros, have in some instances resulted in animosity, court cases between borrowers and their lenders and battles for control of assets.
But most transactions set in motion processes that allow the new lender to gain control of the assets efficiently or settle the loan quickly.
| Portfolio | Seller | Face value | Buyer | Region |
|---|---|---|---|---|
| (€m) | ||||
| Churchill | Aviva | 3,650 | Lone Star | UK |
| Jewel | Nama | 2,400 | Hammerson/Allianz | Ireland |
| Parrot | Commerzbank | 2,200 | JPM/Lone Star | Pan-European |
| Rathlin | RBS | 1,890 | Cerberus | Ireland |
| Poseidon | Lloyds | 1,200 | GS, CarVal and BoI | Ireland |
| N/A | Commerzbank | 752 | Oaktree | Germany |
| Wagner | Goldman Sachs | 650 | Otto Group | Germany |
| Gaudi | FMS | 604 | Oaktree | Spain |
| Commander | Bankia | 560 | Sankaty | Spain |
| Griffin | Danske Bank | 540 | BoI/Goldman Sachs | Ireland |
| Portfolio | Seller | Face value | Region |
|---|---|---|---|
| (€m) | |||
| Arrow | NAMA | 7,200 | Ireland |
| Neptune | Erste | 3,500 | Romania |
| Goya | Ibercaja | 900 | Spain |
| Sun | Commerzbank | 900 | Pan-European |
| Chloe | Sabadell | 800 | Ireland |
| Mamut | Santander | 800 | Spain |
| Tristan | Goldman Sachs | 800 | Germany |
| More | CaixaBank | 780 | Spain |
| N/A | GE Capital | 700 | Germany |
| Arch | Nama | 608 | Ireland |
| Sandokan | UniCredit | 500 | Italy |
“In general, buyers resolve individual loans via amicable resolutions with related counterparties, making them part of the solution, where possible,” says David Ruiz, director of Deutsche Bank’s commercial real estate special situations group.
The way that is done varies from portfolio to portfolio and buyer to buyer, but, say industry veterans, some principles apply generally.
The purchasers are almost always private equity firms, but occasionally they are banks such as Deutsche Bank, though both tend to put the loans into the hands of a servicing company to administer. This market is so large for some purchasers that many have set up their own dedicated NPL servicing businesses; Lone Star’s Hudson Advisors is one example, among many.
Wences Bunge, global co-head of the real estate group at Credit Suisse, says companies set up these offshoots because they are more efficient. “This gives them a better management of those NPLs than the original banks could offer,” he says.
Once in the hands of the servicers, the next steps depend on the quality of the underlying loans, their level of default, and, for some companies, the value of the underlying assets.
Federico Montero, a partner in the debt advisory team at Cushman & Wakefield, says: “The first step is always to try do a deal with the borrower, giving them the opportunity to refinance their position or present a payment plan.”
This can result in “the selling of the real estate assets securing the loans in order to pay back debt owed by the borrower”, according to Ruiz. “The intent is to sell them in an open and transparent process in order to maximise value for all parties.”
On other occasions, according to an asset manager closely associated with some of the bigger purchases in recent times, the borrower might be encouraged to refinance rather than sell.
The lender that the owner of the loans pushes the borrower towards for refinancing can be a contentious subject. In some cases there has been pressure on borrowers to refinance through the lending arm of the purchasing business.
For the purchaser of the loan portfolio, it secures control of a now-performing loan and brings in an income stream that could otherwise have been lost to another finance company.
Generally the response to this approach is positive. Borrowers are often surprised to be given the option of keeping their asset through a refinance rather than foreclosure.
“In the UK and Ireland, purchasers have found that borrowers have repaid faster than expected. That was the case for the IBRC portfolios sold last year,” Montero says.
Ruiz says: “In general, the type of specialised investors and asset managers that purchase and manage these problematic loan portfolios want to maximise the value of the assets for the benefit of both the creditor and debtor.”
Maximising value does not always mean taking legal ownership of the underlying real estate. This can be counterproductive for some owners of loan portfolios.
One reason for this is the lack of liquidity in direct real estate and the speed at which returns are expected to be made on NPL purchases. Striking a refinancing deal can be a lot quicker and cheaper than enforcing and selling assets and often there is no intention of taking ownership of the real estate.
If loans have already been enforced upon prior to their sale, or if the new lender is left with no option but to enforce owing to a lack of other refinancing options for the borrower, the lender may look to line up “back to back” deals to sell such assets as soon as the initial trade is completed.
If such trades are not possible, loan portfolio buyers will have to carry out a business plan to asset manage and increase the value of the property. Such business plans are often put in place when the initial underwriting of the portfolios is undertaken during the bidding process.
In some instances, assets have had very little capital expenditure for years because of a lack of cash for investment from either the former lender or the borrower. As the result of small initiatives, such as offering rent-free periods to tenants, fit-outs or minor refurbishments, the value and likelihood of renting vacant space can increase remarkably.
The discount to the face value of a portfolio is determined by the likely cost of these asset management and servicing requirements. The greater the amount of work required at any stage, the greater the discount demanded by the bidder.
But the bid price is also determined by the length of time the purchaser expects to hold the loans on its books. The quicker a resolution can be found, the shorter the time the owner of the loans has to deploy its cash and as a result the higher its return on its investment.
The length of NPL buyers’ business plans can vary enormously.
Ruiz says: “This will be very dependent on the situation but generally ranges from 18 to 36 months.”
When it is considered that even relatively small portfolios can consist of more than 100 underlying assets, sorting through this in such a short time, and ensuring that there is no great conflict between parties, is a difficult task.
Bunge says: “This is a much more complicated market than people think it is. It is not that straightforward.”
For that reason, the market is occupied by the same few players: they have the expertise and resources to do it right, and make the most money out of this most complex of market segments.
Anatomy of a foreclosure
When NPL purchasers do decide to foreclose and take control of an asset, the result is a little more public than when borrowers opt to refinance. Assets from Lone Star’s UK Eurohypo portfolio show how it is possible to track some assets’ journey of ownership.
July 2013 Commerzbank sells Eurohypo’s non-performing UK loan book, codenamed Acorn, to Lone Star for £1.3bn, financed by Wells Fargo. Lone Star almost immediately forecloses on the majority of the loans, taking direct control of the real estate.
June 2014 Most assets are moved on within the next few months. Oaktree buys £280m of logistics from the portfolio under the code name Woodstock.
April 2015 Oaktree Capital sells the portfolio to Blackstone for £360m.
Summer 2015 Blackstone refinances the deal with Goldman Sachs for £250m.
