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Buyers Seek Bargains in U.K. CRE Loan Portfolio Sales

U.K. banks looking to offload large portfolios of commercial real estate (CRE) loans are offering buyers financing options to make sales more attractive.

There have been a number of high-profile attempts by banks to sell large portfolios of CRE loans in 2011 at significant discounts, according to a report from Bank of America Merrill Lynch.

The numbers support this statement. In a report, Standard & Poor's analysts said that the overall European commercial property loan sales have almost reached €4.4 billion amid the widespread deleveraging by banks.

Credit Suisse sold a majority stake in its €2.1 billion ( $2.82 billion) book of European CRE loans, which mark the bank's exit from this type of lending in Europe.

Lloyds Banking Group has also sold a portfolio of 38 nonperforming loans, named Project Flagstaff, backed by secondary quality property in the U.K. to Telereal Trillium for £47 million, reflecting an initial yield of 11%. The bank is also in the process of finalizing the sale of its Project Royal loan portfolio, which has a nominal value of £1 billion.($1.57 billion).

Another £2.1 billion of distressed U.K. CRE loans is set to be sold in the next few months, according to CoStar Group.

Societe Generale's nonperforming, predominantly French loan portfolio might sell at a 50% discount.

Although CRE loan portfolio sales are an attractive way for banks to reduce exposure to the sector and raise capital, getting buyers on board has required sellers to offer investors the option of vendor financing. They have also had to sell the assets at a discount.

Royal Bank of Scotland (RBS) attempted to sell a £3 billion loan portfolio in 2011 but had to withdrew the offer given the limited demand from buyers who wanted vendor finance, according to the BofA Merrill report.

After this initial attempt, RBS went on to sell a smaller portfolio sized at £1.4 billion. The bank ended up selling a 25% stake to Blackstone Group in a deal called Project Isobel. The transaction, BofA Merrill reported, has not closed yet because Blackstone has reportedly struggled to obtain outside financing for the purchase.

Santander has similarly stalled on its sale of a €3 billion Spanish loan portfolio to Morgan Stanley for a reported €1.8 billion, which is equal to a 60% discount to par.

"There may be limited interest from banks to finance large NPL purchases, in our estimation," said BofA Merrill analysts in the report. "Uncertainty around the value of the properties and the (senior ranking) swaps may present significant obstacles for banks to lend against NPLs in our view. As a result, vendor finance may be necessary to complete sales, although this may not achieve the desired deleveraging for the selling bank."

They said that Lloyds is reportedly considering vendor financing in the sale of its £1 billion Project Royal loan portfolio.

Potential buyers - such as Cerberus Capital Management, Blackstone, Lone Star Capital Management, and Apollo Capital Management - are also looking to recover their investments quickly through discounted loan sales.

However, for banks selling these assets at a discount can potentially take away more capital than it gain. This further pressure on capital values can prove to be a negative for CMBS performance, S&P analysts said.

"Banks face pressure to raise capital, but we expect many banks are likely to avoid capital-destroying asset sales," BofA Merrill analysts said in the report. "Instead, we see de-levering as more likely to be achieved by closing derivative positions, selling non-core businesses, or reducing new lending."

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