European Banks: Here's a Loan to Buy Our Loans

Banks offer financing to buyers of their distressed assets

It’s come to this: European banks, under pressure from regulators to unload distressed assets, are having to lend buyers the money to get the deals done. Royal Bank of Scotland Group may loan Blackstone Group as much as £600 million ($939 million) to help the private-equity firm buy a stake in a £1.4 billion commercial mortgage portfolio, say three people who asked not to be identified because they weren’t authorized to speak about the deal. Credit Suisse Group, Switzerland’s second-largest bank, agreed to finance the sale of $2.8 billion in soured property loans to New York-based private-equity firm Apollo Global Management at a 57 percent discount last December, according to a person with knowledge of the transaction. In Ireland, the agency set up to purge Irish banks of risky property loans says it will provide as much as 70 percent financing to help unload commercial assets. “The use of vendor financing to delever defeats its own purpose,” says David Thesmar, a professor of finance at HEC Paris, a business school. “It shows banks’ deleveraging is going to be tougher than planned.”

Lenders have pledged to whittle their assets by more than €775 billion ($1 trillion) within two years as regulators press them to meet a 9 percent core capital ratio by June 2012. Because credit is scarce, banks are financing some transactions themselves even if it means keeping loans on their balance sheets. Richard Thompson, a partner at PricewaterhouseCoopers in London, said half the loan sale deals that his firm is advising on involve vendor financing.

RBS, which got a £45.5 billion taxpayer bailout in 2008, said in July that New York-based Blackstone would find outside financing to buy the parcel of commercial property loans, according to people with knowledge of the talks. Yet as Europe’s sovereign debt crisis worsened, the world’s largest buyout firm found it increasingly difficult to line up loans to cover 60 percent of the £1 billion purchase price, say sources. So buyer and seller worked out an arrangement under which RBS is lending Blackstone the money to buy a 25 percent stake in a special purpose investment vehicle. RBS will retain a 75 percent stake, which the bank says it will pare over time. The transaction is scheduled to close within weeks. “We think this innovative structure could serve as the model for future transactions as banks look to dispose of noncore real estate assets,” Michael Nash, chief investment officer of Blackstone Real Estate Debt Strategies in New York, said in the statement.

In a similar deal, RBS also provided a loan in September to help Patron Capital, a London-based buyout firm, buy into a joint venture that owns 24 hotels seized by the bank after their owner defaulted on its loans. “You need vendor finance to get deals done. There’s not enough money out there,” says Patron’s managing director, Keith Breslauer.


    The bottom line: Forced to deleverage, European banks are using vendor financing to attract buyers for soured loans and other assets.

    Before it's here, it's on the Bloomberg Terminal.