In the alternatives space, there are those firms that like a challenge. And then there's Cerberus Capital Management.
The firm led by Steven Feinberg's most notable transaction of late was buying Chrysler for $7.4 billion last year in the mother of all turnaround deals. Not to pass up further opportunity in difficult industries, however, it recently made a $1 billion bet on the US residential sector. According to an announcement by Canadian bank (Canadian Imperial Bank of Commerce) CIBC, a fund controlled by the firm won a “competitive” auction to acquire $1 billion of CIBC's residential real estate portfolio via a sale of senior notes. The deal was announced on 3 October.
There was a pressing need for CIBC to reduce its exposure to the US residential sector. Canada's fifth-largest bank has been hit badly by exposure to subprime investments. In its last three financial quarters it has been forced to write down more than C$6.7 billion ($5.3 billion; €4.1 billion) on its assets. As a result of the deal, the bank is able to strengthen its financial position by improving its Tier 1 capital ratio.
Under the terms of the agreement, Cerberus is paying in cash for the debt. Once (or if) the debt is repaid, though, the Canadian bank will retain the whole ownership of the portfolio, allowing it to profit if the value of it should increase.
What's more, the bank has not agreed to provide any performance guarantee for the portfolio, adding more risk for Cerberus. CIBC will continue to collect the mortgage repayments from the US homeowners in order to pay the notes.
“This transaction sets a floor under CIBC's exposure to the US residential mortgage market,” said CIBC president and chief executive Gerry McCaughey. “At the same time, retaining ownership of these securities, combined with the option regarding the timing of any redemption of this note, provides us with important flexibility to benefit from a future recovery in the cash flows of these securities.”
The deal is being seen as unusual because, according to experts, similar sales have not allowed sellers to benefit from any upside and the sellers provided finance to the purchasers. Ron Lalonde, a senior vice president at CIBC told Reuters: “I don't think there have been any other deals done like this.”
In a way, Cerberus is doing what the US government has pledged to do with its $700 billion bailout plan. It is helping take assets off the balance sheet of a major bank. As with Chrysler, the success of Cerberus's transaction is not a given. However, you have to take your hat off to the firm for doing the due diligence in the first place and being able to put a value on the portfolio.
Deals decline in US
The number of commercial real estate deals fell globally by 57 percent over the last year, according to a report by Real Capital Analytics. In the US, transactions were down by as much as 77 percent. However things may not get better in the third quarter of 2008, with estimated transaction volumes expected to be down 80 percent compared to the previous 12 months.
Industrial buys in NJ
The Hampshire Companies has picked up two industrial properties in New Jersey, including a 122,599-square-foot industrial building in Springfield, and an 80,000-square-foot property in West Caldwell. The acquisitions were made through Hampshire's $350 million Hampshire Partners Fund VII and its Hampshire General Fund targeted to high-net-worth investors.
Brazil's affordable housing market will get a boost from private equity real estate firm GoldenTree InSite Partners, which committed up to R$200 million ($104 million; €74 million) of equity to a joint venture with developer Atua Construtora. The deal is GoldenTree's first in the country's affordable housing market.
Moving in to multi-family
Philadelphia-based private equity real estate firm BPG Properties acquired the Northwoods and Chestnut Hill multifamily complexes in North Middlesex, Connecticut. The two properties totaled 650 apartment units. The deal represented the first phase of a three-property multifamily deal with the third property to be acquired later this year.
Private equity real estate firm O'Connor Capital Partners sold the retail and commercial component of its Manhattan House property. Madison Capital paid $86 million for the property, comprising 102,842 square feet of retail and commercial space, including seven street-level stores, office space, and a parking garage.
A consortium of investors including Citi Infrastructure Investors has won a $2.5 billion contract to privatise Chicago's Midway Airport. The consortium, called The Midway Investment and Development Corporation, included Vancouver Airport Services, a 50-50 partnership between the Vancouver Airport Authority and Citi Infrastructure Investors and John Hancock Life Insurance Company.