12 June 2014

One of the big business stories in recent months related to Cerberus Capital Management’s acquisition of NAMA’s Project Eagle loan portfolio estimated to be worth £1.3bn making it the Agency’s largest single loan book deal to date. The deal marks another stage in the process of de-leveraging property loans and assets. In order to get rid of non-performing loans/assets, lenders are typically faced with three options: consensual asset sales, enforcement over assets or debt sales. The latter option allows for larger tranches to be sold quickly to one buyer rather than multiple individual asset sales, which would not only take longer but also potentially flood the market.

Project Eagle is the latest in a number of debt sales that have had a significant impact upon the local property market, which started effectively with Lloyds’ decision to sell a substantive part of its Irish property loan book, Project Harrogate to Oaktree Capital Management for £260 million. In March of this year, global private equity firm Lone Star purchased commercial property loans originating through the IBRC, formerly Anglo Irish Bank’s UK businesses, Project Rock and Salt, for €7.3 billion. Recently, RBS has recently concluded the sale of Project Button with US hedge fund, Davidson Kempner, Kennedy Wilson and Deutsche Bank acquiring various tranches of loans, some of which pertained to Ulster Bank.

So we know what is being bought, but who are the buyers? To date, they are all private investment or capital management companies headquartered in the United States and operating globally. Cerberus, one of the world’s leading private investment companies, was established in 1992 and describes itself as “a pioneer in the acquisition and management of non-performing loans” while Lone Star was founded in 1995 and invests in real estate, equity, credit and other financial assets across the world. So far, so good, but what are the implications of these sales and how are these new owners likely to handle the assets that they have acquired?

In the short to medium term, it is unlikely that we will see any dramatic changes and certainly not dumping of product on to the market. Although the loans have been sold at a substantial discount, from £4.5 billion to £1.3 billion in the case of Project Eagle, the debt remains with the borrower i.e. the original property owner.

Typically, new loan owners seek to work with borrowers, understand their portfolios and take a strategic view that could include developing new business plans and agreeing new asset strategies. On the other hand, non-compliant borrowers perhaps face a period of uncertainty and we do not envisage any of these new loan owners adopting a different approach to the original banks, which could mean that enforcements will ensue.

Since the loans have been bought at a discount, this may well offer borrowers an opportunity to re-finance. Indeed, we are starting to see new bank lending albeit on a selective basis into property deals which will reinvigorate the market. In general, the market sentiment is one of increased optimism inspired by positive economic indicators that point to genuine recovery. Northern Ireland still offers investors enhanced returns compared with other regions and demand for good quality assets is leading to rising prices in some instances, for example, Westfield’s proposed sale of Sprucefield Retail Park to Intu (a new investor to Northern Ireland) for £68.4 million.

Although it is still early days, there is reason to believe that loan sales will be a positive step forward, which coupled with a return to longer-term, normalised lending should result in a more favourable and sustainable property landscape.

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