Project Royal finalists line up finance ahead of deadline

By James Wallace - Monday, November 21, 2011 15:00

Lone Star and Cerberus Capital Management look to be the frontrunners to win Lloyds Banking Group’s Project Royal loan portfolio, ahead of next Monday’s deadline for committed financing terms to be submitted with second round bids.

The three finalists in the hat to win Lloyds' £1bn UK property loan portfolio, which also includes Colony Capital, are expected to price the portfolio at around £600m, reflecting a combination of: current valuation on the underlying assets; blended discount on the loans; and modest interest rate swap breakage costs.

The senior debt supporting the bids is expected to be capped at £300m with Goldman Sachs and Citigroup understood to be behind both Lone Star and Cerberus Capital’s bids, while Lloyds Banking Group will also provide stapled finance, if required.

JPMorgan Cazenove, appointed as sales agent on the loan portfolio, is also thought to be a potential debt provider, if required, while M&G Investments is also understood to be considering providing senior debt.

Pricing the senior debt has proved to be one of the moving pieces of the deal since it first came to market at the end of the summer, given the increase in banks’ funding costs and the contagious impact of peripheral Eurozone sovereign debt reducing investment banks’ lending intentions as well as their confidence to sell down their exposure through their syndication channels.

Pricing is thought to have risen from 450 bps to between 500 bps and 600 bps over LIBOR, while exploratory talks with mezzanine providers looks now less likely to result in a mezzanine or preferred equity component. Earlier in the process, a £60m mezzanine loan was mooted between 1,000 bps and 1,200 bps over LIBOR.

Colony Capital is understood to have held talks with UBS to provide senior debt, while it can call upon financing from Lloyds and JPMorgan.

“Lloyds knows they are being heavily scrutinised by the market on this deal and they are very keen to make ensure the correct winner wins – and in a timely fashion,” said a person familiar with the situation.

Lone Star’s bid is supported by its subsidiary Hudson Advisors, the loan servicer, while Cerberus owns a 25% stake in LNR Partners, which owns loan servicer Hatfield Philips.

The circa 35-strong loan portfolio consists of £1bn worth of debt secured by UK commercial property independently valued at around £700m, which splits broadly three ways: a third of the portfolio is non-performing, defaulted loans; a third has matured and not repaid; and a third are performing loans.

The collateral is all built and a mixture of office, retail and industrial. “There are a reasonable number of properties in the pool which are vacant for one reason or another,” said another person familiar with the portfolio.

The average LTV across the portfolio is around 140%. The swap liabilities are minimal – estimated at around £30m – while only a “very small number of loans have so far gone down the LPA receiver route,” said a person familiar with the deal.

Lloyds is looking to close the deal by the end of the year, so that it can report its continued increased pace of non-core commercial property disposals in time for its annual report next year.

The loan portfolio sits in the bank’s £23.6bn Corporate Real Estate Business Support Unit (CRE BSU), headed up by managing director Richard Dakin.

To some extent, Lloyds is thought to have benefited from Royal Bank of Scotland’s further delayed closure of its £1.4bn Project Isobel portfolio in terms of securing the necessary financing to close the Royal deal.

Despite the comparisons, the deals are considered more different than similar.

RBS gave a clear indication to the market more than six weeks ago that the Isobel deal would close by early November. Despite further delays, the deal is expected to close before the end of the year.

All three banks behind Isobel are understood to be out, while exploratory conversations with a number of hedge funds to provide shorter-dated debt proved unworkable given their higher funding costs. However, Isobel is still expected to close – most likely – with around £600m in stapled senior debt finance provided by RBS.

All parties declined to comment.

jwallace@costar.co.uk

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