LOANSALES ARE BACK

My first job in the property market, was as a junior surveyor in the Whelan Partnership in Belfast, in 2001.??

I moved from there to get qualified as a chartered surveyor in Osborne King around 2003, and at that time, the real estate market was incredibly dynamic.??

By the time I moved to what was known as BTW SHIELLS, and now Lambert Smith Hampton in 2005, the market was flying.

Over the course of the next few years, I was fortunate to be part of an incredible team, who transacted in hundreds of millions of pounds worth of real estate deals, over a number of years.

I didn’t know at the time, but whenever I moved to BTW, I was really catching the coat tails of the Celtic Tiger, a bull market in the real estate world, where property values kept increasing, and deal after deal was being done.?

Like all good things though, and life experience has taught me this also, all good things?must come to an end, and the Irish Banking crash, which became part of the Global Financial Crisis in 2008, certainly took the wind out of, not only the property market in Ireland, but also the Global Financial markets right across the world.?

PROJECT EAGLE

A number of years into this crisis, we started to see what where being referred to as loan sales starting to happen, post 2011,?within the Irish Banking System.?

To me at that time, and most people in the industry, we hadn’t heard about loan sales before, but what we did know was that every bank in the country was now selling down its real estate debt, to largely US vulture funds, for pence in the pound.

Names like Kennedy Wilson, Goldman Sachs, Lone Star, Cerberus, Apollo, and a stream of other US Private Equity debt funds, entered the Irish property market, prediominately?through hoovering up billions of pounds worth of real estate loans, at significant discount.

Irish banks decision around 2011 to start selling down these loans, and take the financial hit, was a strategy employed, largely as over time, it would allow the banking sector to repair it’s broken balance sheet, incur the loss, and to move on again asap in an attempt to get back into profit mode.?

The now infamous Project Eagle deal, is a classic example of what was going down at the time.?

This trade compiled a debt book comprising in it's entirety, all of?Northern Ireland’s Irish banking property related loans, acquired by NAMA (Irish government fund), which was sold to US Vulture Fund CERBERUS in 2014, for ￡1.6BN, which was a significant write down on the core debt.

Most people accept now that this trade really kickstarted the property market in the North, as the borrowers where now back in play, trying to do a deal with the new owner of their debt, who was willing to play ball, if you had the cash of course!

Fast forward ten years and Ireland in particular, is now very well versed on this process, with every bank in the country at this stage, having sold hundreds of millions of pounds worth of debt to US Private Equity Funds.?

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DEJA Vú

In the last couple of months, we have been working on a number of deals with debt funds, who acquired loans In Ireland, on behalf of borrowers, trying to reach a settlement on the loan monies outstanding.?

On one case, the debt was sitting with Pepper in Dublin, who only acquired this debt from another US fund in 2021.??Our client advised me when GDP took on the case last summer, the loan had been already sold, five times from 2008.??

The asset attached to the debt, was a property in Dublin, and despite the attempts of the borrower to come to an arrangement with each new owners of the debt, he could never get a deal done.

In January I put what I believed to be a strong offer on the table, only for it to be refused.??I noticed over the course of the last few months that Pepper were not engaging as I would have expected them to, and it proved difficult to get them to engage.?

Last week the client advised that he received a letter from Pepper to advise his debt had been sold??(again)– for the sixth time in the last fifteen years - to another debt fund.?

On the same letter, the new owner of the debt was named, and this week, I will be engaging to see if we can finally come to an arrangement with this new party, to bring matters to a close.?

Since the turn of the year, we have had a number of cases, where debt which had been sold previously to a US fund in the last few years, has now been sold onto another fund.?

My own sense is that over the course of the rest of 2023 and into 2024, we are going to see this trend continue at pace, as many of these funds attempt to exit the market place.

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WHY NOW?

If you have been following my newsletter over the last few weeks, you will know that I have been paying a lot of attention to the?“repricing of money phenomenon”,?and the subsequent impact?the higher costs of borrowing are having, right across the business spectrum.

US debt funds are like any other business, in that they also borrow money, often from banks, to buy, in this context, loans of Irish banks and debt holders in Ireland, at discount.??

If, for example, they were paying an interest coupon of 3% for debt acquired in 2019, for a fixed term of say five years, to refinance that same debt today, might costs the fund in the region of 8-12%.??

This is a material change, therefore?has clearly implications on the return on their investment.?This is exactly?why, I am now predicting we are going to see a lot more of these trades, and recycling of loans, not only in Ireland, but right across the world.?

The reality is that even private equity debt funds cannot escape the interest rate time bomb, so they either do a deal with the borrower now, or sell on the loan to someone else.???

This is what likely happened to our client at GDP in the last few weeks, in my assessment.?

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US BANKS PREPARE FOR LOSSES IN RUSH FOR COMMERCIAL PROPERTY EXIT

As I was writing this piece over the weekend, it was something of a peculiar coincidence that in Monday’s Financial Times, one of the headlines on the front page was about the re-emergence of loan sales across the US Banking sector.?

The story breaking was that some US banks are now preparing to sell off property loans at a discount, even when borrowers are up to date on repayments, a sign of their determination to reduce exposure to the teetering commercial real estate market.?

The willingness of some lenders to take losses on so-called performing real estate loans, follows multiple warnings that the asset class is the “next shoe to drop” after the recent turmoil in the US regional banking industry, reported the FT.?

The article also states that HSBC USA is in the process of selling off hundreds of millions of dollars of commercial real estate loans, potentially at a discount, as part of an effort to wind down direct lending to US property developers.

Meanwhile, it is also worth noting, PacWest last month sold $2.6bn of construction loans at a loss, and a number of other banks are making it easier to execute similar sales in the future by changing the way they account for commercial real estate debt.?

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BANK OF IRELAND BACK SELLING LOANS?

Bank of Ireland announced in Q4 of 2022 that it will also be disposing of an Irish non-performing loan portfolio comprising primarily Private Dwelling House (PDH), and Buy to lets, together with a smaller portfolio of non-mortgage securities.

On this particular trade, the?loans will be transferred to a company called Mars Capital Finance Ireland DAC (“Mars”) who will be managing the loans as Legal Title Holder.

This deal is expected to complete over the course of 2023, at which time, representatives from Mars Capital Finance will be in touch with the borrowers regarding repayment.?

As set out above, by selling this loan book at discount, Bank of Ireland are incurring the loss on their balance sheet now, allowing them to move forward into the new financial year in an effort to improve their overall financial performance.?

An observation from my side would be that this?increase in?loan sale trades in Ireland,?appears to have slipped under the radar somewhat, of the main stream media this time round, as there hasn’t been much chat or coverage?about it.

However at GDP it is something we have been following closely for years, and continue to be active in this space, bringing solutions to the table on behalf of our clients.?

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More specifically, our team is looking at the?re-emergence of this?market, as an?opportunity for our client base, as we feel we have a unique understanding into?how these funds operate.

We are of the view that given the friction and headwinds running through the economy, it presents an opportunity for borrowers to get deals done.?

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My advice to everyone is to keep paying attention to what is going on here, and in particular, if your loan has been sold, or is likely to be sold anytime soon, you need to be very proactive on the matter.?

That's all for this week, but as ever, if I can help you or your business with anything in the debt or funding markets, please get in touch.?

Have a great week,

CD

Conor Devine MRICS,?has been working across the property, debt and funding markets for over twenty years, and is passionate about helping others in the industry overcome challenges and to reach their business goals.?