The plan by Royal Bank of Scotland to spin off £2bn-£3bn of UK property loans will be one of the most highly anticipated transactions of the next 12 months.
It is the first instance of a UK bank getting rid of a significant chunk of assets in one go, giving investors a chance to buy into a pool of loans it has put together.
And while it is early days in the process, some details are beginning to emerge of how the transaction could proceed. If it is seen to be a success, other lenders are waiting in the wings to undertake similar deals.
It is understood that, rather than undertake a straight sale of the loans that it wants to divest, RBS is working with investment bank Lazard to create a fund or similar vehicle into which the loans would be placed, and into which third-party capital would be injected.
Pradeep Pattem, a managing director in the structured credit team at RBS, is leading the process.
Interestingly, while Lazard is understood to have sounded out potential investors on the basis that a single company would put equity into the vehicle, it is also possible that a small group of new partners could invest in the fund, essentially creating a closely held joint venture or club investment structure.
This would reduce the amount of equity that investors would have to put into the deal, reducing their risk profile and hence potentially reducing the discount investors might seek when buying into the loans.
It is also understood that RBS could retain a stake in the new vehicle. Again, this would reduce the risk for potential investors, and it would also allow RBS to carry on managing the loans, meaning that it could earn fee income.
It also allows RBS to share in any upside that might occur if the value of the assets secured against the loans were to rise significantly.
The fact that RBS might retain a stake in the vehicle would provide one of the main complication points from a structuring point of view.
RBS is understood to want the new vehicle to be classified as being off its balance sheet, so that it can reduce its exposure to property loans, and crucially, to reduce the capital it has to hold in reserve to mitigate against potential future loan losses.
Whether the new vehicle has one investor or several, it is also understood that new equity would not necessarily come into the fund all in one go, but could be phased in over several quarters.
This would allow RBS to spread any impairment losses that might occur from transferring loans at a discount over a longer period, rather than booking them all in one go.
The loans are part of the bank’s non-core division, which was set up in 2008 to sell off or run down loans and assets that RBS no longer considered central to its business. On the property side, assets owned by the bank, such as the Grosvenor House and Cumberland hotels, are in the process of being sold
But the bank’s results for the six months to 30 June last week showed it also has a £36.9bn portfolio of property loans that it needs to get rid of by 2013.
This is £3.6bn lower than at the end of 2009, primarily because RBS had chosen not to participate in refinancings when loans reached maturity. Its overall property loan book stands at £83.8bn, around 5% lower than at the end of 2009.
Of these non-core loans, £12.9bn are in the UK, and the bank has said that, while it sees UK property lending as a core part of its business, there are some clients or loans that it does not see as core and does not wish to continue with.
If the process is successful, it will be from this non-core division that further disposals come, and rumours are already swirling that the bank will test the water with a disposal process for its Spanish loan book, much of which is unsecured corporate debt.
A stock-starved market may be happy to jump on the loans RBS considers non-core, whatever the buy-in structure.
michael.phillips@estatesgazette.com
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