Blackstone Opens Europe Spigot as Distressed Deals SurgeDavid Carey
Blackstone Group LP raised more than $4 billion in 2009 to buy European property assets anticipating that cash-strapped banks would be forced to sell as the region’s debt crisis worsened. Almost all of it sat idle for two years.
Today, the inaction has given way to a surge of deals, as lenders from Lloyds Banking Group Plc to Commerzbank AG cut loose soured real estate, corporate and consumer loans. Sales of loan portfolios and other unwanted assets by European Union banks could reach 60 billion euros ($82 billion) in face value this year, according to PricewaterhouseCoopers LLP, the most since the firm began tracking data in 2010.
“Asset sales by banks have absolutely accelerated,” said David Abrams, a senior portfolio manager who oversees 3.9 billion euros in funds to invest in European loans for New York-based private-equity firm Apollo Global Management LLC. “We’re five years into the crisis, but it’s just the beginning of the disposition process.”
The pickup in European asset sales, driven by looming regulatory deadlines and a stabilizing economy, is providing an opportunity for overseas buyers to put money to work as the U.S. stock-market rally makes deals in the world’s largest economy more expensive. Blackstone President Tony James said in July that deals are shifting to Europe, where buyers can find more distressed assets, from the U.S., where funds are taking advantage of strong credit and equity markets to exit holdings.
“Europe is a happy hunting ground,” said Marc Lasry, chief executive officer of Avenue Capital Group LLC, which has invested more than $8 billion in loans of struggling European companies. “Bank after bank” has been offering his New York-based firm assets for sale, he said at the Bloomberg Markets 50 Summit in New York last month.
Apollo is among the most active investors, amassing loans with a face value of about 12 billion euros, including 11,000 mortgages in the U.K. Blackstone, the world’s largest alternative-asset manager, last year put $3.5 billion into distressed European mortgages and properties, the most its real estate group has plowed into the region in one year.
Investors also are buying European properties from real estate developers and taking over troubled companies or lending directly to them where banks have scaled back.
EU banks unloaded 29 billion euros of portfolio loans and assets such as mortgage-servicing units and branches in the first half of 2013, according to Richard Thompson, a partner at PwC in London. That compares with sales of 46 billion euros for all of last year, 36 billion euros in 2011 and 11 billion euros in 2010. The majority of sales have been distressed loans, Thompson said.
Most of the portfolios of nonperforming commercial real estate loans sold by banks last year were priced at 40 percent to 50 percent of par value, according to PwC. Richard Furst, Avenue Capital’s chief investment officer, said that prices for corporate loans after they’ve defaulted range from 30 percent to 70 percent of par.
By buying bank loans at such discounts, Avenue can take over European companies at valuations of three to five times earnings before interest, taxes, depreciation and amortization, a common yardstick for valuing acquisitions, Furst said. Such prices can give rise to annual investment returns of 20 percent or more, he said. The average multiple for private-equity deals involving a U.S. target was 9.4 over the past 12 months, according to data compiled by Bloomberg.
Lloyds agreed last month to sell a group of European commercial real estate loans to Cerberus Capital Management LP for about 263 million pounds ($427 million). In July, Dallas-based Lone Star Funds agreed to buy about 1.3 billion pounds of nonperforming U.K. property loans from Commerzbank.
UBS AG, the Zurich-based bank exiting some businesses to bolster capital, is seeking buyers for about $800 million of distressed corporate debt, two people with knowledge of the matter said this week. The holdings are part of a pool of mostly fixed-income assets that UBS moved to a separate unit within the past year with the intention of selling, said the people, who asked not to be identified because the auction is private.
PwC estimates that sales of loan portfolios and other unwanted assets will reach more than half a trillion euros over the next decade. That encompasses only sales of loans bundled into groups. Lasry said sales by European lenders of single distressed corporate loans could add 200 billion euros.
Hedge funds and private-equity firms have raised as much as 70 billion euros to invest in distressed European debt, so the supply of loans eclipses investor demand, according to PwC.
While banks in the EU have about 45.5 trillion euros of assets, according to the European Banking Federation, they have been slow to unload them because of accounting rules, political pressure and to avoid selling at steep discounts.
Among the more aggressive sellers are London-based Lloyds and Royal Bank of Scotland Group Plc, which the U.K. government saved from collapse during the financial crisis. The two banks said they have reduced unwanted assets by more than 420 billion pounds. Spain set up a so-called bad bank last year to unload 90 billion euros of soured real estate loans from rescued lenders.
By contrast, German, French and Italian lenders have been slower to shrink assets. While selling loan portfolios is one way to meet global Basel III capital standards that go into full effect in 2019, many European lenders have sought to avoid realizing losses on investments. The European Central Bank’s policy of flooding the banking system with cash also has eased pressure to sell at depressed prices.
It’s a “game of waiting while the banks are able to provision more and more each quarter, each year” so they can sell loans at discounted levels, said Alexandra Jung, a partner and co-head of European investments at Oak Hill Advisors LP, a New York-based debt investor with more than $20 billion under management. “The scale of the market is there, and we’ve seen banks beginning to sell.”
Political pressure is another obstacle. Investors scouting for bargains in France or Germany have found it easier to buy debt from banks based in other countries. After a binge of cross-border lending in the years before the crisis, European banks are now pressed by local authorities to dump foreign loans in favor of domestic borrowers, said Nicolas Veron, an economist at Bruegel, a Brussels-based research group.
“French banks are not big sellers of French assets,” said Avenue Capital’s Furst. “In France, Italy, Greece, Ireland and the U.K., the last loans that banks will typically sell are domestic loans.”
The buyers are predominantly from the U.S. That’s a reflection of a long history of distressed-deals in the U.S., as well as the novelty in Europe of banks forced to sell bad loans.
“None of the significant players is local,” said Victor Khosla, founder and chief investment officer of Strategic Value Partners LLC, a $3.4 billion Greenwich, Connecticut-based hedge-fund and private-equity firm that has made distressed investment in Europe since the crisis began. “It’s the American firms that have the culture and the DNA to do this.”
The distressed-asset sales are part of a larger effort by European banks to slim down. RBS, based in Edinburgh, said last week that a group headed by private-equity firms Corsair Capital LLC and Centerbridge Partners LP is the preferred investor ahead of a planned initial public offering of its 314 branches. RBS has to sell the branches by 2014 to comply with EU rules after receiving a 45.5 billion-pound bailout in 2008 and 2009.
Alberto Gallo, an analyst at RBS, estimates that banks in the euro area need to chop 2.8 trillion euros of assets. Much of the reduction will result from running off performing loans, and some banks will continue to sell mortgage-servicing units, branch networks and other profitable operations.
“People were hoping it would be like the U.S. in 2008 and 2009, where banks would sell loads of stuff and clean up their balance sheets,” Avenue Capital’s Lasry said. “Europe is doing that, but it will take 5 to 10 years.”
Blackstone, with $229.6 billion under management as of June 30, has been among the biggest buyers of distressed European real estate loans from banks since 2011. Late that year the New York-based firm took over 1.4 billion pounds of commercial mortgages from RBS in a transaction the bank partly financed.
The deal was part of more than 100 debt-portfolio acquisitions investors including Apollo, Lone Star and Cerberus have struck since the end of 2009, according to PwC’s Thompson.
The American buyers aren’t just picking up bundled loans from banks. Blackstone’s $63.9 billion real estate unit has focused on buying single European properties threatened with foreclosure and on debt-laden developers. The unit, which can make investments in distressed or non-distressed assets, bought underused European warehouses this year and 1,860 apartment units in Madrid. It purchased Dublin’s Burlington Hotel late last year in a foreclosure sale from Lloyds at less than a quarter of its 2007 price.
Since last year, Blackstone has teamed with Canada’s biggest pension-fund manager to buy 640 million euros in nominal value of margin loans backed by a 12 percent stake in Gecina SA, France’s third-largest real estate investment trust. It also bought almost all of 900 million euros in face value of debt owed by Gouda, Netherlands-based Multi Corp., a shopping-mall developer that said in March it couldn’t meet interest payments.
Blackstone last month completed a restructuring that gave it close to full ownership of Multi, said a person with knowledge of the matter who asked not to be identified because the deal is private. Jonathan Gray, who heads the firm’s real estate unit, said Gecina and Multi were the 2009 fund’s biggest investments. He declined to specify how much Blackstone spent.
“In Europe, distressed is all we’ve been buying,” Gray said.
Blackstone’s GSO credit unit has made loans to cash-constrained companies as banks pulled back. It injected $1.7 billion in six European companies over the past two years, including EMI Music Group Ltd., U.K. homebuilder Miller Group Ltd. and Spanish cement maker Cementos Portland Valderrivas SA.
The unit plans to funnel $1.5 billion to $2.5 billion of a $5 billion global fund it completed raising last month into restructurings and bailouts of European companies that have violated the terms of their loans or have maturing debt they can’t repay, according to GSO Co-Founder Bennett Goodman.
“About a third to a half of our current backlog of direct-lending deals is European,” up from about 20 percent to 25 percent a year ago, Goodman said.
KKR & Co., Oaktree Capital Group LLC, Oak Hill Advisors and Colony Capital LLC are among other private-equity firms doing rescue financings.
Colony, a $27 billion global real estate investor based in Santa Monica, California, is pursuing rescue financings of offices, shopping centers and movie theaters in Spain, France, Italy and other countries, according to CEO Tom Barrack.
“We think that in the next 24 months, the recapitalization opportunities in Europe will be amazing,” Barrack said. “We’ve seen a gigantic renewal of interest on the part of banks to engage in discussions with us about recaps of their borrowers.”
Avenue Capital, Strategic Value Partners, Oaktree and Sankaty Advisors LLC have raised more than $13 billion for European distressed takeovers. These are achieved by amassing loans or bonds at depressed prices and swapping them for equity stakes in negotiated restructurings. Most of the deals have been in the U.K., Germany and other countries in northern Europe with creditor-friendly bankruptcy laws.
Avenue Capital is working on three distressed-company takeovers in Europe, having done about a dozen in the last five years, Furst said. It already has deployed 70 percent of a $2.78 billion Europe-focused distressed fund it completed raising in
2012. Takeovers last year of Travelodge Hotels Ltd., a U.K. hotel chain, and waste-management company Biffa Group Ltd. involved busted leveraged buyouts.
“With some of the 2006 and 2007 leveraged buyouts, we’re starting to see some of the equity owners decide to do extensive restructurings,” Furst said. “As more companies do that, it will have an accelerating impact” on distressed deal making.