AIB’s Project Pivot and Project Kildare shortlists revealed

Cerberus Capital Management and a joint bid by Kennedy Wilson and Deutsche Bank are the first two to emerge on a four-strong shortlist for Allied Irish Bank’s£383m Project Pivot sub-performing loan portfolio.

Several big name private equity bidders failed to make the second round including: Lone Star, Forum Partners, Apollo, Blackstone, Goldman Sachs Whitehall Funds, Fortress Investment Group, Starwood Capital, PIMCO as well as Chenavari, the London hedge fund. 

Project Pivot’s four finalists have to submit final bids in mid-September. This will include an outline of a workout business plan on a loan-by-loan basis.

Citigroup is managing the sales process.

CoStar News was first to reveal AIB’s Project Pivot portfolio six weeks ago.

Cerberus and joint venture partners Kennedy Wilson and Deutsche Bank will be pouring over the portfolio lining up potential buyers of the underlying properties secured by the non-performing loan portfolio, as part of the wider pricing of the portfolio.

CoStar News understands that bids are likely to come in deeper than 50%, possibly as high as 60%, given the proportion of defaulted loans by the time the deal closes with the eventual winner, and the quality and distress of the underlying portfolio.

Project Pivot’s total outstanding debt is £383m, which includes three large syndicated loans worth £68m, secured by 247 properties – down from 251 – from around 40 separate borrowers.

The “most recent” valuations against the aggregate £383m outstanding debt is £220m, which puts the Project Pivot LTV at 174.1%, a reflection of the proportion of the loans which are in default – currently 46% – due to loans past due, defaulted on interest payment or in another kind of covenant breach.

More than two thirds of the 108 loans will be past due by the end of this year, by which time the winner will be selected, with 37% of loans maturing in 2011 and another 30% by the end of this year. In 2013, another 16% of loans are due to mature, with the balance of loans covering scattered maturities out to 2020.

The largest loan in Pivot is a £31m loan secured by 35 properties, which are predominantly bars and nightclubs in the North East and North West of England. The second largest loan is a £30m performing loan, secured by a 14-strong portfolio of hotels valued at a combined £20m, putting the loan’s LTV at 150% at the most recent valuation.

By value, the sector composition of Pivot is 33% residential, 27% hotel and leisure and 21% commercial.

The regional breakdown of Project Pivot is: 31% in the South East; 17% in the North West; 15% in the North East; 12% in Scotland; with the balance scattered throughout the rest of the country including around 1% in Ireland.

Project Kildare

Lone Star, a joint bid by Kennedy Wilson and Varde Partners, and Goldman Sachs’ Special Situations Fund comprise Allied Irish Bank’s three-strong shortlist for its predominantly Irish non-performing loan portfolio, the €675m Project Kildare, CoStar News understands.

Varde Partners’ emergence as Kennedy Wilson’s partner on Project Kildare reflects a diversifying strategy by the Beverly Hill-based global real estate investor, which recently confirmed its €2bn partnership to buy UK and Irish non- and sub-performing loans with Deutsche Bank.

Project Kildare has at least an 80:20 split towards Irish commercial properties, with the balance in the UK. Dublin is the single largest city concentration in Project Kildare which is expected to price at a discount steeper than 70% on the nominal value, which indicates a cash buy by the eventual winner.

The portfolio comprises performing and non-performing loans with some past maturity and many of the Irish loans in some form of default.

CoStar News understands that Allied Irish Bank has not yet entirely taken complete mark-to-market write-downs on Project Kildare.

Morgan Stanley is managing the sales process.

PricewaterhouseCoopers partner Peter Spratt runs Allied Irish Bank’s non-core unit, and has just passed the midway point of his secondment to the Irish bank to manage the disposal of legacy property loans.

Project Harrogate

Cerberus, Lone Star, a joint bid by Kennedy Wilson and Deutsche Bank, and Oaktree submit final bids tomorrow on Lloyds Banking Group’s £625m Project Harrogate.

Loan-on-loan financing is expected to be submitted.

When CoStar News revealed that Lone Star won Lloyds’ £923m Project Royal on 7 December, we were first to report that Citigroup and Royal Bank of Canada was backing the loan portfolio with debt. 

In the same article, CoStar was also the first to reveal that Goldman Sachs was Cerberus’ financier, which is also expected to back its Harrogate bid.

Kennedy Wilson’s bid will likely include debt from its equity joint venture partner Deutsche Bank, which is likely to syndicate if possible, while Oaktree is thought to favour a cash purchase.

The key feature of the final round Harrogate bids will be each of the four bidders’ comments on the sale and purchase agreement, the legal document which governs the transfer of the loan portfolio with details on the level of representation and warranties entitlements.

These are the agreed allowances by the buyer to return a loan to the selling bank in certain cases, for example where inaccurate loan information is provided which affects the value of the underlying properties.

In the final stage in the process of loan portfolio sales, the legal negotiations between deleveraging bank and private equity buyer can be arduous, with inevitable opposing interests between both parties: banks want to give as little recourse as possible for bad loans to be returned, and private equity buyers wanting as much as possible.

Such negotiations, along with defining timing of transfer to bidders’ tied or preferred loan servicer, and at least an outline of the business plan will all feature in the final Harrogate bids tomorrow.

All parties declined to comment.

jwallace@costar.co.uk

About James Wallace

Finance Editor, CoStar News
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