Cerberus Capital Management and Lone Star front the four-strong shortlist for Lloyds Banking Group’s nominally-valued £625m Project Harrogate non-performing loan (NPL) portfolio, CoStar News understands.
Lloyds has whittled down the finalists from a 25-strong list of bidders which submitted two weeks ago, with Starwood Capital, a combined Kennedy Wilson and Deutsche Bank bid, and Varde Partners, the hedge fund, all thought to also be contenders for the second round list.
Shortlisted bidders were informed at the end of last week, and will now enter a detailed due diligence process, which in previous loan sales has proved expensive.
JPMorgan, the bank running the sale of the circa 70-strong loan portfolio, has tentatively set a six week deadline for shortlisted bidders to submit second round bids, together with loan-on-loan financing term sheets.
In the first round stage, in which as many as 25 prospective loan buyers lodged bids, JPMorgan asked for loan portfolio financers not to be involved. Leverage of between 50% and 60% loan-to-cost (LTC) will be available from a widening pool of lenders who are attracted by the significantly higher margins, this type of lending commands. Recent financing deals have been at 600 basis points, which has almost become a defacto benchmark price.
That process is set to get underway now, with Lloyds keen to want to select a winner and close the deal by December at the latest. This is to ensure that the deleveraging can be reported in its annual results next February, in a schedule consistent with the process for the £923m Project Royal, won by Lone Star in the first week of last December.
Loan-on-loan financing for last year’s Project Royal portfolio was provided by Citigroup and Royal Bank of Canada, with Citigroup having syndicated a proportion of its £150m piece to AIG, marking the recovering global insurance giant’s first European real estate debt deal since rebuilding its team last summer.
Project Harrogate – also dubbed Project Royal II – comprises around 70 loans secured against slightly fewer than 60 secondary properties throughout the UK owned by around 25 different borrowers.
The NPL portfolio includes several B notes and capex facilities which explains why there are more loans than underlying properties.
Critically for prospective buyers assessing the value in the loans and assets, is that the majority of the loans in the NPL portfolio are past due and many are also in default – important variables which help determine the discount at which the likely competing private equity players will bid to seize control of Project Harrogate.
The balance of the portfolio by outstanding loan balance and asset value is top heavy, with the largest 20 loans making up the majority of the outstanding £625m nominal value. The largest 20 properties are also all outside of London, with the bulk of the portfolio by loan volume spread throughout the regions and small in loan and asset size.
JPMorgan, as part of its mandate with Lloyds, would provide financing if external debt could not be sourced, although such debt would likely be higher priced.
All parties declined to comment.