AIB trades €400m Santander branch loan to hedge funds at 20% discount

By James Wallace - Thursday, February 07, 2013 16:30

Allied Irish Bank sold a €400m syndicated senior loan secured by a portfolio of more than 1,100 Banco Santander bank branches throughout Spain to a consortium of separate hedge funds yesterday at 80 cents in the euro, CoStar News can reveal.

The group of hedge funds, likely to investing individually, traded the senior debt with AIB yesterday for a combined €320m, reflecting a 20% discount.

AIB’s nominal €400m senior loan reflects 25% of the total €1.6bn outstanding senior debt, secured by 1,156 Spanish bank branches which were acquired by Sun Capital, Pearl Insurance and Drago Real Estate Partners in a sale-and-leaseback with Santander back in November 2007 for €2.04bn.

Barclays’ corporate distressed desk managed the loan sale on AIB’s behalf, which is considered similar in investment appeal to corporate debt, given the extremely long unexpired lease term remaining on the network of Spanish Banco Santander bank branches.

The first mortgage syndicate senior loan was extended to a single purpose landlord owning Santander bank branches leased to the Sun Capital investor consortium.

The trade comes ahead of a much-needed restructuring of the total €1.9bn senior and mezzanine capital stack, given a covenant default, ahead of its November 2014 maturity.

North of 25 hedge funds and private equity funds were understood to have bid on the loan sale, which AIB first tried to sell as 18 months ago.

The first loan sale attempt broke down after serious legal issues emerged with the loan’s enforcement rights over the collateral. These uncertainties lingered in the second sale attempt, delivering a wide bid spread in pricing second time around.

For hedge fund, one way to evaluate the debt trade is to assume the properties would have no value at the expiry of their leases, and then to calculate what return is required as a premium on Santander risk.  

The total €1.6bn total senior debt stack includes BNP Paribas as well as a consortium of Spanish and Austrian banks.

There is also a €300m mezzanine syndicate - comprised of original seller Santander, BNP Paribas, Societe Generale, Bank of Scotland and a private equity fund typically unconnected with real estate investment.

The estimated value of the bank branch portfolio is thought to be somewhere between €1.6bn and €1.7bn, implying that equity joint venture partners – Sun Capital, Pearl Insurance and Drago Real Estate Partners – are out-of-the-money, and the mezzanine syndicate are partially sunk.

The 12.33m sq ft Santander bank branch portfolio includes branches in Ponte Gadea covering Madrid, Barcelona, Valencia, Valladolid, Bilbao, Málaga, Oviedo, Palma de Mallorca and Seville, in which the bank will remain as tenants for a maximum of 10 years plus.

Santander retained the right to repurchase some of the branches, and will remain as tenants for a period of between 45 and 47 years, according to CBRE which acted on behalf of Santander at the time of the sale-and leaseback.

All parties declined to comment.

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