TSB Said to Join Bidders in Race for British Granite Loan Book

  • TSB said to target 3 billion pounds of Granite mortgages
  • Lender said to have joined up with preferred bidder Cerberus

TSB Banking Group Plc joined forces with all bidders including frontrunner Cerberus Capital Management in a race to acquire a part of a 11.5 billion-pound ($17 billion) mortgage book being offloaded by the U.K. government, according to people with knowledge of the matter.

The British lender, which was acquired by Spain’s Banco de Sabadell SA, is seeking to buy about 3 billion pounds of the assets, said the people, asking not to be identified because they’re not authorized to talk about it. Private-equity firm Cerberus was selected as the preferred bidder for the loans of now defunct Northern Rock Plc, people said last month.

U.K. Chancellor of the Exchequer George Osborne plans to sell the mortgages to help pay down the national debt. Northern Rock funded about 50 billion pounds of U.K. mortgages via a securitization vehicle known as Granite before being nationalized seven years ago. The acquisition could improve TSB’s profitability by around 220 million pounds over four years and help it gain a larger market share in Britain, according to analysts.

“You’re effectively buying a revenue stream,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, England. “TSB is a bank with systems that are too big for it. If they can just plug those loans into their infrastructure, you’re just buying extra revenue.”

Spain’s El Confidencial reported TSB’s interest in about 3 billion pounds earlier. Spokesmen for TSB, Banco de Sabadell and U.K. Asset Resolution Ltd., which oversees the remaining assets of bailed-out lenders, declined to comment.

Lloyds Boost

TSB may be able to replicate the earnings boost it got from a similar loan portfolio handed over by former parent Lloyds Banking Group Plc to meet European Union rules after it was bailed out by the state. The 3.3 billion pounds of mortgages were selected to boost TSB’s profitability by about 220 million pounds in the four years after its initial public offering in 2014.

“It’s not going to be massively different to the Lloyds portfolio,” Greenwood said. “Without knowing exactly what the financial terms are in those mortgages, it’s hard to be conclusive. It may be that it’s 10 million pounds or 20 million pounds per year one way or the other.”

JPMorgan, Blackstone

TSB, led by Paul Pester, made a profit of 32.4 million pounds in the third quarter, Sabadell said on Oct. 23. The lender is among so-called challenger banks seeking to win over more customers from larger British rivals including Lloyds and Barclays Plc.

The sale of the mortgages attracted interest from some of the biggest banks and investment firms, with lenders seeking to earn fees by providing financing to private-equity buyers and arranging asset-backed bonds.

JPMorgan Chase & Co. bid for the home loans with partner CarVal Investors LLC, as did a separate group that included Blackstone Group LP, Citigroup Inc. and Deutsche Bank AG, people familiar with the matter said last month. Lenders including Bank of America Corp., Credit Suisse Group AG and Morgan Stanley, plan to provide finance to back Cerberus’s acquisition of the mortgages, according to people familiar.

The bulk of the 115,271 Northern Rock loans, which form part of the Granite portfolio, pay a 4.79 percent standard variable rate, according to company filings. Most of the mortgages have a loan-to-value ratio of more-than 80 percent, while 7,753 of them are in arrears.

“It would make a very material benefit to them," said Ian Gordon, analyst at Investec in London, referring to TSB’s bid. “The logic of a portfolio acquisition to accelerate improvement in operational efficiency would seem to be overwhelming. An acquisition of that nature would make greater economic sense than for any other buyer.”

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