Archive for December, 2014

Cerberus wins Ulster Bank’s giant Project Aran and NAB’s Project Henrico

Cerberus Capital Management has won Ulster Bank’s giant Project Aran non-performing loan portfolio and National Australia Bank’s Project Henrico, completing a sweep of four major commercial real estate (CRE) loan portfolio wins in the last week.

Royal Bank of Scotland Group, Ulster Bank’s parent company, has announced this morning that Cerberus has paid £1.1bn (€1.38bn) for the Project Aran, which had an unpaid loan balance of €5.6bn and gross liabilities of gross liabilities of £4.8bn (€6bn).

Cerberus and RBS signed this deal in the early hours of this morning, fending off still competition from Lone Star and a consortium comprised of CarVal Investors, Goldman Sachs’ special situations fund and Apollo Global Management.

Project Aran was comprised of approximately 1,300 borrower groups, over 6,200 loans with around 5,400 properties. More than 75% by loan balance is secured by Irish assets and about 20% in Northern Ireland, with more than 90% of the loan portfolio in default.

RBS said in the statement that the carrying value of the loans is c.£1bn and generated a loss of £0.8bn, principally impairment provisions, in the year to 31 December 2013.

The statement continued: “The transaction, which represents RWA equivalent of c£1.2bn as at 30 September 2014, is part of the continued reduction of assets in its RBS Capital Resolution division and is in line with the bank’s plan to strengthen its capital position and reduce higher risk exposures.”

Completion is expected in the first quarter of 2015. Eastdil Secured sold Project Aran on RBS’ behalf.

Project Aran was upsized from an initial circa €1.7bn portfolio, back in October. For the last report on the portfolio, please click here.

Cerberus has also paid around £950m for Project Henrico, NAB’s second portfolio of UK non-performing CRE loans from.

Project Henrico – comprised of 1,300 borrower groups and 5,400 properties throughout the UK – had a nominal value of £1.2bn, implying a discount of 21%.

CoStar News revealed last week that Cerberus, PIMCO and CarVal Investors were exclusively invited by NAB to bid on the bank’s Project Henrico portfolio as the three finalists on the Project Chestnut UK non-performing loan sale which traded to Cerberus for £485m, as revealed by CoStar News.

As a result of the Project Henrico sale, a small gain is expected to be recognised in NAB’s March 2015 half year accounts, and an estimated £127m of capital will be released for the NAB Group when the transaction is settled.

The Project Henrico loans are mainly defaulted, watch and high loan-to-value loans, with the sale reducing the higher risk loans in the portfolio by 93%.

NAB Group Chief Executive Andrew Thorburn said NAB had accelerated the run-off of the NAB UK CRE portfolio, with the great majority of the remaining non-performing loans being sold.

“This is an important step forward, effectively bringing closure to one of our legacy positions. The sale of these higher risk loans in the NAB UK CRE portfolio is another important milestone in our strategy of reducing our low returning legacy assets and sharpening our focus on our core Australian and New Zealand franchises,” Mr Thorburn said.

“Pleasingly the remaining NAB UK CRE loans are largely strong performing loans, and we will look at other options to manage this small remaining portfolio.”

Morgan Stanley advised NAB on the sale of Project Henrico.

Cerberus, whose European real estate division is headed by managing director Ron Rawald, last week won Nationwide’s Project Carlisle, paying just above £680m.

Also last week, Cerberus won a portfolio of Denmark non-performing loans – dubbed Project Mermaid – with a face value of DKK 7.5bn (circa €1bn) from Finansiel Stabilitet, the country’s bad bank.

In April, Cerberus won NAMA’s loan book of Northern Irish property loans, dubbed Project Eagle, paying around £1.2bn for the £4.5bn nominally valued loan portfolio.

Debt charity warns increase in interest rates could cause financial crisis in Northern Ireland

A debt charity has warned an increase in interest rates could cause “financial crisis” in Northern Ireland, while the Bank of England (BoE) believes the majority of UK homes wouldn’t suffer as the result of a rise

A debt charity has warned an increase in interest rates could cause “financial crisis” in Northern Ireland, while the Bank of England (BoE) believes the majority of UK homes wouldn’t suffer as the result of a rise.

Citizens Advice highlighted householders are in a different economic position than those in London and South East England.

Interest rates are currently at the record low level of 0.5%, with a rise unlikely until late next year.

Kathy McKenna, of Citizens Advice, said that people in Northern Ireland are still suffering from tight household budgets.

“Household incomes fell harder here during the recession and we are seeing more food banks than ever.

“There may be talk of overheating in the London property market, but over here there is a chill wind this winter for many struggling families.

“People are really fearful of what an interest rate rise would mean. For many who have been struggling to hold on, it would bring financial crisis.”

An increase in the bank base rate is not expected until around September 2015.

In yesterday’s report, the BoE said: “Overall, the evidence does not suggest that gradual increases in interest rates from their current historically low levels would have unusually large effects on household spending.”

Ms McKenna however said: “In the past year, Citizens Advice in Northern Ireland helped over 9,500 people deal with approximately £80m of debt.

“In a year when we saw no increase in the base interest rate, we also witnessed a 4.5% increase in people with debt. That tells its own story.

“Our message to the Bank of England and to government is that decisions affecting Northern Ireland households should only be taken when growth appears in people’s pay packets – not just on economists’ bar graphs.”

And Ms McKenna has encouraged consumers to plan ahead for the inevitable rise in interest rates.

ECB belatedly looks to reign in liquidity assistance

The European Central Bank (ECB) is considering tightening the secretive emergency liquidity assistance (ELA) regime that allowed the Central Bank here to extend vast amounts of debt to Irish banks during the crash.

ELA is a form of emergency funding that allows national central banks, including ours, to directly create and pump cash into struggling commercial banks outside the normal ECB money creation regime.

At the peak in 2012 Irish banks owed €67bn in ELA loans, and the debts were named in the controversial Jean Claude Trichet letters to the late Brian Lenihan in 2010 as a key reason why Ireland was forced into a national bailout.

The loans are given at the discretion of the national central bank although they have to be approved by the European Central Bank.

A source, speaking on condition of anonymity, told Reuters that the ECB has held discussions at working level focused on limiting the period of time for which banks could make use of ELA.

Christian Schulz, an economist at Berenberg bank, said any such move to restrict the use of ELA would play well in Germany, where ECB policy is widely seen as being too loose.

This could go some way to assuaging German concerns about the ECB embarking on a round of sovereign bond purchases – a possibility it is considering.

“I think that will go down well in some part of the German media and at the Bundesbank,” he added.

Irish Independent

Early interest rate rise a huge risk, BCC warns

A premature interest rate rise could present a “huge risk” to the British economy, the British Chambers of Commerce (BCC) has warned.

The business lobby group said the UK’s dependence on consumer spending and mortgages meant it was “particularly sensitive” to interest rates.

The warning came as the BCC trimmed its growth forecast for 2014 to 3% from 3.2% and for 2015 to 2.6% from 2.8%.

It said the lowered forecast was an “ominous warning sign”.

The group blamed lower-than-expected growth in services, household consumption and exports for the cut in its growth forecast.

“Downgrades to our growth forecast are a warning sign that we still face a number of hurdles to securing a balanced and sustainable recovery,” said BCC director general John Longworth.

He warned that factors such as the weak eurozone economy, slowing growth in emerging markets and political uncertainty in Ukraine and the Middle East were hitting both business and consumer confidence.

The BCC’s chief economist David Kern said the impact of these “unavoidable factors” meant low interest rates were important to “minimise the risk of the recovery stalling”.

Seven-year high
Interest rates have been at their historic low of 0.5% for more than five years, with just two out of the Bank of England’s nine-strong Monetary Policy Committee voting to increase rates in recent months.

The BCC expects a first interest rise to 0.75% in the third quarter of next year, with rates reaching 1.75% by the end of 2016.

Its prediction for growth this year is in line with the Office for Budget Responsibility (OBR)’s recent Autumn Statement forecast.

The government’s independent forecaster expects 3% growth this year and 2.4% next year.

Despite the downgrade, if the predictions are correct, 2014 will mark the UK’s fastest rate of growth for seven years.

Interest rate rises ‘won’t wreck the recovery’

The implication of the Bank of England’s new assessment of household indebtedness is that a modest rise in interest rates would not sink the economy, but would be acutely painful for hundreds of thousands of people.

So on a day when many are asking why a rich country such as the UK has a growing need for food banks, it is the social implications of inevitable increases in interest rates that may be more important than the economic effects.

The most striking statement in the Bank’s new debt analysis is that “gradual increases in interest rates from their current historically low levels” should not “have unusually large effects on household spending”.

This is slightly odd – which is why the Bank of England is quick to point out that it is not the official view of the Bank’s Monetary Policy Committee, but is the view of Bank officials who “feed in” to the MPC’s decision.


The reason it is a bit counter-intuitive to say that interest rate rises won’t have a magnified effect on spending and the growth of the economy is that the indebtedness of households remains high by historic standards.

According to the Office for Budget Responsibility, household liabilities are 146% of household income, which is 20 percentage points below its peak at the end of the boom years, but 30 percentage points above where it was in the 1990s.

The UK, and especially its consumers, remains massively indebted.

So any rise in interest rates should have an enlarged effect on how little indebted people have available to spend. And that indeed has been the official position of the Bank of England.

Why might the Bank want to change its official position and be less fearful of rate rises?

Household spending
Well, there are two reasons.

One is that “only” 57% of those with mortgages told the Bank of England that they would cut their spending if interest rates rose two percentage points.

In the survey of 6,000 households carried out for the Bank by NMG Consulting, some 35% said they would simply save less if rates rose 2%, while 24% said they would work more or find other ways to boost income from employment.

And in bad news for the banks and building societies, 23% said they would request changes to their loans – which is another way of saying they would change the repayment profile to the detriment and cost of the lender.

Or to put it another way, a rise in interest rates would potentially generate significant losses for banks, if the survey proves to be correct.

The second reason why a rise in interest rates might not stymie the economy is that savings have increased since the 2008 debacle. And if interest rates were to rise, savers’ income would rise.

However, the survey suggests that savers will spend just £1 for every £10 increase in their income, whereas borrowers will cut their spending by £5 for every £10 of their income drop.

Even so, the Bank calculates that a 2% rise in interest rates would reduce spending by around 1% – which, apparently, is not massively out of whack with historical norms.

All of which is to say that the Bank does appear to be steeling itself for the effects of an interest rate rise, because it knows one is likely to be necessary next year – and maybe earlier than the autumn date anticipated by investors.

Household debt
None of which is to play down the hardship for many people that may be caused by a rate increase.

There are still 4% of those with mortgages, little changed from last year, who pay out 40% or more of their gross income to service their debts. That is 360,000 people who are at significant risk of not being able to keep up the payments – and who have precious little money left after shelling out for interest and principal.

That is 1.2% of all households, which – as it happens – is very much at the low end of where this measure of financial distress has been since 1991.

But UK households are still very indebted by all historical standards. The share of households with a mortgage debt-to-income ratio above 3 is still high by historical standards, at 5.8%, compared with less than 3% during most of the 1990’s. But that proportion of fairly highly indebted households has come down from a peak of 7.64% in 2011.

So how can debt distress be relatively low? Well, it is because – as if you need telling – interest rates have been at record lows since March 2009.

One important question, therefore, is what would happen to the number of people in financial distress if interest rates were to rise?

Well, the Bank tries to answer this question for a two percentage-point rise in rates, combined with a 10% rise in income for all households or a 0% rise in income for all households.

By the way, there is no magic to the 2% assumption. Interest rates may rise by more than this or less than this over the next two to three years.

But given the sheer magnitude of debts bearing down on the UK economy, it is reasonable to assume that the Bank of England would not wish to raise interest rates by more than two percentage points over the coming few years, for fear of mullering us all.

So here is the thing.

Wage rises
If the income of households were to rise 10% before the rate rise, the proportion of those in distress would rise by 50%, from 1.2% of households to 1.8% of households.

And the actual number in this vulnerable category would rise from 360,000 households to approximately 500,000 (I know these numbers aren’t consistent – but there is lots of rounding of numbers and percentages going on at the Bank).

Which is a big increase in financial pain. But even 1.8% of households classified as vulnerable would not be particularly high by recent standards.

That said, the proportion in this distressed group would increase to 2.4% of households, in the scenario of interest rates rising without a prior increase in incomes. And 2.4% would be a high proportion in distress by historical standards.

Now it is unlikely that the Bank would raise interest rates by 2% if incomes had not risen in general.

However, the most vulnerable households are those that are most pessimistic about their wage and salary prospects.

And if they happen to be in low or intermediate skilled employment, or part-time employment, they may be right to be pessimistic – since prospects for earnings growth in this part of the labour market are widely seen as depressed.

All of which suggests that interest rate rises, as and when they come, may not destroy the economic recovery, but they may wreck the lives of many families.

Lloyds sells Irish mortgage portfolio to Goldman Sachs and CarVal

Lloyds is withdrawing from its heavily lossmaking Irish operation, which had £19.7bn of net exposure at its peak in 2010. That contrasts with Royal Bank of Scotland, which recently decided to keep its Ulster Bank subsidiary, despite having lost about £15bn in Ireland since the financial crisis.
The Lloyds deal, codenamed Project Parasol, was agreed for a purchase price of slightly less than half of the face value of the underlying assets, according to people familiar with the situation. Lloyds and Goldman declined to comment.
The portfolio is made up of both buy-to-let residential mortgages and commercial mortgages, including for offices, retail properties and industrial sites.
The sale, agreed over the weekend, leaves Lloyds with only £1bn of net exposure to Irish non-performing loans. It also has about £5bn of performing Irish mortgages left in its non-core division, which is being steadily wound down.
The deal follows the sale by Lloyds of an £870m portfolio of Irish residential home loans to Lone Star of the US at the end of October.
One private equity executive specialising in distressed mortgage investments said the market for such deals was booming. Activity is being fuelled both by greater competition for deals between the mostly US funds that have arrived in the UK and by the greater willingness of banks to provide financing for such transactions.
“There are a lot of funds coming into this market from the US, where this has already happened,” he said, citing the likes of Apollo Global Management, Lone Star, Oaktree, Centerbridge, Cerberus and Fortress.
The private equity executive said the average purchase of an Irish distressed mortgage portfolio two years ago would have been financed with debt equivalent to half the value of the deal and cost 400-425 basis points over Libor.
Now, he said it was possible to finance similar deals with 70 per cent debt, costing only 300-275 basis points over Libor. A lower cost of financing and increased debt levels mean that investors can offer higher prices for mortgage portfolios.
“This is a positive development for banks with large non-core mortgage pools,” said the private equity executive. “The aggressiveness of banks and others to lend on these portfolios has changed dramatically in the last 12-18 months.”
The likes of JPMorgan, Goldman, Wells Fargo, Deutsche Bank and Credit Suisse are among the most active banks in providing such financing, he added. Some of the investment banks have also been snapping up mortgage portfolios themselves.

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