Increasing its exposure to the UK and Irish markets, the American private equity giant Cerberus has agreed to pay £2.3bn for two portfolios of distressed property loans. The Royal Bank of Scotland (RBS), and its Ulster Bank subsidiary, is reported to have lost £3.5bn in the sale.
Cerberus agreed twin deals to take on the £1.2bn Project Arran portfolio of commercial property loans from National Australia Bank and a £1.1bn portfolio of Irish commercial real estate loans from RBS.
The bank, majority owned by the British Government, had originally valued both loans at £4.7bn. If the £2.3bn figure is accurate RBS would have let the massive property package go for around 76 per cent below par.
Along with buyout rivals Lone Star, Oaktree and Kennedy Wilson, the Steve Feinberg-founded Cerberus is now one of the largest owners of UK and Irish commercial loan assets. “Cerberus has been one of the most active buyers of this kind of portfolio,” explained Mathieu Roland-Billecart, a corporate real estate finance partner at Ernst & Young.
“There have been quite a lot of transactions of this nature over the last four years, driven by the banks trying to reduce their exposure to the real estate market.”
There are inherent dangers, he added. “It’s more risky than buying property, because you’re buying the loan and therefore you need to convert to the property. So there’s more skill in it, but it’s well within the capabilities of the large private equity groups.”
Cerberus reportedly beat off competition from Lone Star and CarVal Investors to acquire the Aran portfolio, with the paperwork expected be completed by the end of March.
The Project Aran deal — the biggest portfolio of loans sold by Ulster Bank since the crash — sees Cerberus take control of more than 6,200 loans secured on 5,400 properties. More than three quarters of the portfolio involves Irish assets, a fifth in Northern Ireland. Around 90 per cent are believed to be in default.
The RBS sell-off is the latest collection of loans tied to Ulster Bank. Project Button, which covered loans tied to Cosgrave brothers’ developments and with a par value of around £627m, was acquired by global capital mangers, Davidson Kempner.
The £941m worth Project Achill, meanwhile, involved mainly Irish commercial real estate. It was bought by Lone Star, with Davidson Kempner and Bank of Ireland picking up smaller chunks of the portfolio.
Ulster Bank has so far cost an estimated £12.5bn in bailout funds. The Chancellor, George Osborne, has admitted that at one time he considered selling or closing the RBS-owned bank before deciding to salvage the business.