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Inside Lloyds’ £625m Project Harrogate

By James Wallace - Thursday, May 31, 2012 15:20

Lloyds Banking Group has formally launched its second UK commercial property loan portfolio, the nominally-valued £625m Project Harrogate, comprising a pool of loans which collectively are in more distress than the inaugural loan sale, CoStar News can reveal.

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 non-performing loan (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.

Lloyds won praise in the market for its smooth handling of the Project Royal I loan sale, in a process managed by JPMorgan, which has been again selected to run Project Harrogate, edging out finalist Credit Suisse which is understood to have run JPMorgan close to win the advisory and sales mandate.

Interested bidders have been signing non-disclosure agreements (NDAs) this week, with the likely long list thought to include Blackstone, Lone Star, Cerberus Capital Management, Colony Capital, Starwood Capital, Kennedy Wilson, Apollo Global Management, Fortress, Deutsche Bank, Texas Pacific Group and Westbrook Partners.

US private equity real estate funds in aggregate have an estimated $127bn of uninvested raised capital – known as “dry powder” – which will be deployed across US and European CRE markets, and as much as $159bn globally, predicted Morgan Stanley in a Blue Paper investor note.

Prospective loan-on-loan financers have grown in number since Lloyds sold Project Royal I, with the emergence of AIG, Starwood Capital, Fortress Investment Group and Renshaw Bay.

These new lenders join the existing banks which have backed previous loan portfolio sales, including Citigroup and Royal Bank of Canada, which together financed Lone Star’s Project Royal I and Excalibur wins, M&G Investments, which financed Kennedy Wilson’s Bank of Ireland UK loan portfolio, and Bank of America Merrill Lynch, which is financing Lone Star’s €200m SocGen NPL portfolio.

Goldman Sachs and Deutsche Bank are also likely finance bidders, while JPMorgan, as part of its mandate, would provide financing if external debt could not be sourced, although such debt would likely be higher priced.

Lloyds Banking Group declined to comment.