EUROPE NEWS: Wall of maturity

There is no denying there has been a paucity of deals in Europe, but The Blackstone Group said it is beginning to see the trickle of deals become a stream.

Chad Pike, co-head of real estate at Blackstone, opened the PERE Forum: Europe in London last month by telling delegates there has been no real “price discovery” in Europe due to a lack of transactions, with the obvious exception of London.

Nevertheless, he revealed that, from September of last year, the New York-based private equity and real estate giant has seen the trickle of transactions become a “stream”As a result, Blackstone is in the process of closing in on five deals in Europe, compared to 2010 when the firm completed none, Pike said. One of them is a deal in Germany that went into bankruptcy in 2008, but that is only now coming out of the process.

Pike explained that Europe’s chapter seven-style bankruptcy procedures are presenting more opportunity, as well as the inevitable maturity of loans taken out in the “target-rich environment” of 2005, 2006 and 2007, when €100 billion in deals were completed on average each year. As typical five-year loans become due, he joked that “it doesn’t take a rocket scientist to work out that a lot of transactions are coming to the point where they needed to be refinanced, recapitalised or otherwise need to enter into bankruptcy proceedings.”

Referring to a “wall of maturity,” Pike pointed to data that suggested €131 billion of predominantly bank debt is scheduled to mature this year, followed by €111 billion next year, €108 billion in 2013 and €110 billion in 2014. At the same time, the level of stated nonperforming loans in Europe is “massive.”

Although the US is the larger market and suffered from greater “craziness” in the run-up to the global financial crisis, the overhang of nonperforming loans in North America is estimated at just €96 billion, while the figure for Europe is far higher  at €380 billion. Of that figure, UK banks hold €140 billion, Spanish banks have €100 billion (although that includes an estimate of “doubtful loans,” as classified by the Spanish Central Bank), Irish banks have €80 billion and, lastly, German banks hold €60 billion. The figure for Germany includes the six large banks: Deutsche Bank, CommerzBank, LBBW, DeutschePost Bank, HSH Nordbank and Bayerische LB. The UK bank figure includes only Royal Bank of Scotland, Lloyds Banking Group, Barclays Bank and HSBC.

Explaining the trickle of deals, Pike said banks cannot afford “hits,” as losses would be material. As an example, the firm estimated that the big banks of Europe are more than 21 times leveraged based on having €303 billion in core equity supporting more than €6.4 trillion of assets. “Inevitably, as loans meet their maker and reach maturity, something has to happen,” he said. “They cannot hide forever.”

Furthermore, Basel III regulations only mean banks will need to reserve more funds against risky assets, Pike noted, adding that Blackstone has estimated that €80 billion of new high-yield debt and €100 billion in equity would be required to recapitalize the transactions of 2004 to 2007. Over the 2011 to 2013 period, the estimated global funding gap is expected to total $245 billion, with Europe being the largest contributor. Indeed, Europe is expected a shortfall of $126 billion, or 51 percent, while Asia will have a gap of $70 billion (29 percent) and the US will have one totaling $49 billion (20 percent).

Pike finished his presentation by telling delegates how Blackstone is responding to investors. “We point to the US, where we have put out $7.5 billion in equity over the last 15 months,” he said. “Every week, we are seeing new deals there, and they are exactly the same type of deals that were done in Europe. Right now, we have five deals we are closing in Europe. Last year, we closed no deals because there either was nothing to buy or we weren’t successful on the deals we looked at due to pricing. This year, however, we are finding more opportunity.”

Pike added: “A lot of people are saying we are going to have to drop our returns, but we are seeing a steady loading of the cannon, if you will, of transactions that will be out there for all firms to invest in over the years. It will just take a while.”