U.K. Sells Off $19.8 Billion of Northern Rock Mortgages

  • U.S. private-equity firm won six-month bidding process
  • Sabadell's TSB to acquire 3.3 billion pounds of mortgages

Cerberus Capital Management LP agreed to buy 13 billion pounds ($19.8 billion) of mortgages the British government has owned since the financial crisis, beating out Goldman Sachs Group Inc. and JPMorgan Chase & Co. for the remnants of Northern Rock Plc.

The U.S. private-equity firm won a six-month bidding process for the home loans, UK Asset Resolution Ltd. said in a statement Friday. Proceeds of the sale, which will help UKAR repay 5.5 billion pounds to the state, included a premium of about 280 million pounds over book value. Cerberus immediately sold 3.3 billion pounds of loans from the so-called Granite securitization portfolio to TSB Banking Group Plc.

Cerberus is taking on the biggest-ever disposal of financial assets by the British government. The buyout firm has spent billions on modified home loans in the U.S. and was the biggest buyer of distressed real estate debt in Europe through the first nine months of the year, according to Cushman & Wakefield Inc.

“This portfolio is an important addition for Cerberus,” John Snow, the firm’s chairman, said in a separate statement on Friday. The acquisition “further demonstrates our commitment to our European mortgage and real estate investment strategy.”

‘Clearing the Mess’

In the decade to the 2007 bank run, Northern Rock grew rapidly to become Britain’s fifth-largest mortgage lender, with assets in excess of 100 billion pounds, according to the U.K. Treasury. The bank relied on wholesale funding and securitization for its expansion, leaving it exposed when markets seized up during the financial crisis.

“Today marks another major milestone in clearing up the mess left by the financial crisis,” Chancellor of the Exchequer George Osborne said in a separate statement. “We are now clear that taxpayers will get back more money from Northern Rock than they were forced to put in during the financial crisis.”

Six Bidders

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

“There was considerable interest,” Richard Banks, CEO of UKAR, said on a call with reporters. “In the second round we got down to six bidders. The fact that we got it away at a premium demonstrates that these are good assets and are performing well.”

JPMorgan bid for the home loans with partner CarVal Investors LLC, people familiar with the matter said previously. A separate group that included Citigroup Inc., Deutsche Bank AG, Blackstone Group LP and Och-Ziff Capital Management Group LLC also bid on the assets, the people said. Goldman Sachs, which had previously aligned with the second group of companies, didn’t submit a bid, the people said.

‘Plug The Gap’

TSB will gain about 300 million pounds in profit over the life of the mortgages, with about 160 million pounds coming in the next three years, Paul Pester, the lender’s CEO, said in an interview Friday. The U.K. bank, which was acquired by Spain’s Banco de Sabadell SA earlier this year, will become the lender to 34,000 customers across the U.K. The loans will still be serviced under the existing terms by UKAR, which oversees the remaining assets of Britain’s fully nationalized lenders.

Pester said the Northern Rock loans will help TSB “plug the gap” from a mortgage portfolio handed over by its former parent, Lloyds Banking Group Plc, to meet European Union rules after it was bailed out by the state. Lloyds, Britain’s largest mortgage lender, gave TSB 3.3 billion pounds of home loans to boost its profitability by about 220 million pounds for four years after it took the company public in 2014.

“That will be running off through 2017 and will have disappeared by 2018,” Pester said. “We have been very attractive to a range of consortia because we obviously have a very good home for these mortgages. We were approached by every group that was bidding.”

Cerberus Refinancing

Cerberus will refinance the assets by buying about 12 billion pounds of mortgages out of the Granite portfolio, winding them up and paying the outstanding securities in full, UKAR said.

Cerberus said it was advised by Morgan Stanley. Bank of America Corp., Credit Suisse Group AG, Lloyds, Morgan Stanley and Natixis SA were preparing to arrange financing for the deal, people with knowledge of the matter said last month. A spokesman for Cerberus in London declined to comment beyond the firm’s announcement.

Credit Suisse advised UKAR on the sale, while Moelis & Co. advised UK Financial Investments, the state organization that manages UKAR.

(A previous version of this story corrected the attribution of Cerberus’s refinancing.)

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