Friday Letter Everything must go

Anglo Irish Bank wants to offload its roughly $10 billion portfolio of US property loans in one fell swoop. Given private equity real estate’s finest are arranging themselves into bidding consortiums, the omens look good that its wish will be granted. 

Now a nationalised entity, troubled Anglo Irish Bank is looking to sell off a giant portfolio of 248 US property loans —and fast. Rather than sell the $9.65 billion portfolio in pieces over time, the Dublin-based bank is hoping to sell it off in its entirety – or possibly in two or three chunks at the most – by the end of this summer.

Tellingly, in a further sign of its need for speed, the bank is not accepting bids on individual loans.

Eastdil Secured and FTI Consulting, which are advising Anglo Irish Bank on the sale, have divided the portfolio into eight pools, the largest being a $2.26 billion pool of distressed office and industrial loans. According to sources familiar with the situation, potential buyers may bid on specific pools or on the entire portfolio.

Prospective bidders include such private equity real estate firms as Lone Star Funds, The Blackstone Group, Fortress Investment Group, Kohlberg Kravis & Roberts, Westbrook Partners and Goldman Sachs, among others.

So why is Anglo Irish Bank so eager to sell off such a huge portfolio?

Simply put, the bank – and now Ireland – needs money. The bank was nationalised in 2009 in order to prevent its collapse. Since then, however, Ireland has faced serious financial troubles of its own, being granted an €85 billion rescue package from the European Union on the condition of the nation introducing a fierce austerity package. Understandably, assets must be sold.

Additionally, and perhaps more directly relevant, this sale coincides with an impending merger between Anglo Irish Bank and the Irish Nationwide Building Society, soon to be doing business under the name the Irish Bank Resolution Corporation. Michael Noonan, the nation's Minister of Finance, stated that the name change was implemented to remove “the negative international references associated with the appalling failings of both institutions and their previous managements”.

Will the bank be able to sell off such a huge portfolio to one single bidder? Since sources say that the bank is only approaching prospective buyers that are in a position to write large cheques, it's very much within the realm of possibility.

Many interested buyers are forming alliances with each other to offer such cheques. Centerbridge Capital Partners, for example, is teaming with American International Group, Paulson & Co and BlackRock for a bid. Blackstone and Deutsche Bank are partnering to bid, as are TPG Capital and LoanCore Capital. Additionally, KKR and Westbrook are joining forces to bid on the portfolio.

Indeed, such is the impetus behind JV bids that one source said interested firms are doing as much due diligence on whom they're partnering with as to how they plan to bid on the loans.

There's a perception within the private equity real estate sector that this is a good investment, particularly for those firms with the ability to turn around large swathes of the portfolio’s non-performing loans, understood to total $5.5 billion. The remaining loans are performing, albeit with varying maturities of up to four years. As always, much will depend on pricing, with current estimations pegging the discount for the non-performing loans at between 50 cents to 80 cents on the dollar.

“There's enough demand from the big boys in the private equity sector to buy off all these loans at once that Anglo won't have to break it up,” said Dan Fasulo, managing director and head of research for data provider Real Capital Analytics. “The underlying real estate is good here [in the US], and that's what's peaking everyone's interest.”

Fasulo added that potential buyers may see the portfolio as an excellent conduit to execute on a loan-to-own strategy for some of the underlying assets.

With so much competition chasing one product however, “pricing will be very competitive,” said one source, adding that it may wind up not being such a good deal in the end for certain bidders. A glance at another recent loan book sale by another partly-nationalised bank, the Royal Bank of Scotland, provides an interesting comparison. In that scenario, those firms deploying capital from debt-specific funds ultimately were better placed to make the investment as the bank proved to be an aggressive negotiator and the structure of the sale worked better for the lower cost of capital of such vehicles than that of traditional private equity real estate funds. That said, the need of the Irish to sell quickly arguably exceeds that of the UK’s banks.

So how will all this turn out? Since Anglo Irish Bank wants this transaction done as quickly as possible, with the first round of bids expected on 9 August, it looks like we won't have to wait long to find out.