So where is Project Royal II? MIPIM is upon us, which means the end of the first quarter is fast approaching, and yet the hotly anticipated sequel to Lloyds’ first loan sale has yet to materialise.
To recap, before Christmas, Lloyds completed the disposal of the Project Royal portfolio of more than 30 bad and not-so-bad loans to Lone Star in a £923m deal which, crucially, was financed by rival lenders.
The circa 40% write-down from this disposal has now been booked, and a new financial year has started, so any discount from a follow-on sale would be marked on a clean slate.
The deal, at what the market agrees was a respectable price, was expected to streamline the process of deleveraging, not stymie it. But the market is still waiting.
In anticipation of a wave of expected loan sales this year, investors such as Blackstone, Cerberus and Lone Star have filled their coffers. Lawyers and advisers are anxiously waiting to be instructed – and growing more frustrated by the day, according to one who expected to be elbow-deep in paperwork by now.
Meanwhile, Royal Mark II, which is expected to be significantly smaller than its predecessor, is still “just a twinkle in the bank’s eye”, according to one adviser, and the loans to be offloaded have not even been selected yet.
A possible source of delay is concerns about the regulatory environment – the net of bank lending regulation in response to the global financial crisis is growing tighter, and its consequences are dominating chat among the banking fraternity.
However, it seems just as plausible that the looming possibility of increased capital requirements would prompt the banks to act ahead of any changes.
A more likely explanation for the delay is that the state-supported banks are simply not under enough pressure to sell. Access to cut-price capital means they are better off financing legacy assets than they are selling them to investors grappling to meet return targets.
A respectful period of delay by rival RBS after the questionable success of its deflated £1.4bn Project Isobel deal, which began life 18 months prior as a £3bn debt solution, is more understandable.
The bank’s on-again off-again sale, which saw Lone Star jilted for rival Blackstone when the Chinese Investment Corporation was revealed as a backer, did little to dent its balance sheet when it was reduced to a 25% stake requiring £500m of finance.
Marathon ahead
But what happened to its European deals? Last summer, RBS, advised by KPMG, was reported to be at an advanced stage in the sale of a €480m package of French real estate loans, while Lazards was being lined up for a German loan sale.
European exposure aside, RBS has £25.6bn worth of UK commercial property loans which have matured or are due to mature this year across its combined core and non-core loan books.
Globally, over the next 12 months, the bank has a total of £34.2bn matured and maturing real estate loans, which comprises almost half of the bank’s entire £75bn exposure.
The consensus view among bankers is that Lloyds has left RBS for dust in the race to tackle its bad debt pile. Indeed, Lloyds slashed more than 17% from its commercial property loan portfolio last year, against RBS’s 14%.
But both banks are still facing a marathon ahead. Lloyds has been whittling down its real estate loan exposure since 2008. It managed to slash £13.5bn last year – its largest annual reduction in three years – leaving it with £65bn outstanding.
Last year, Lloyds selected Grainger to manage a vehicle holding £500m of buy-to-let properties which could eventually be sold off or floated. It also teamed up with Green Property in Dublin to help manage properties put into receivership with up to €1bn of commercial loans behind them from the former Bank of Scotland (Ireland).
Lloyds also undertook the first sale of an aggregated portfolio of receivership assets in what was known as Project Flagstaff by the market, although referred to as Tyler by the bank. Finally, it completed the successful £923m Project Royal loan sale to Lone Star in December – without stapled debt.
Not all of these moves resulted in an immediate reduction of debt from the bank’s hefty balance sheet, but they do indicate a programme of initiatives which Lloyds promises to continue with this year.
No one doubts the gargantuan task faced in the reduction of these legacy debt mountains. No one questions the difficulty of the investment and debt markets, with falling capital values and further debt shortages expected.
But more progress must be made soon if both banks are to meet their five-year deleveraging plans. From Lloyds we need more of the same, from RBS we need more.
bridget.oconnell@estatesgazette.com
