Commerzbank is increasingly unlikely to entertain discounts for Eurohypo’s €7bn UK commercial real estate predominantly performing loan book, as Germany’s second largest bank seeks to recover the maximum capital from the wind down of one of Europe’s formerly biggest real estate lenders.
CoStar News was first to report Commerzbank’s u-turn in the UK, on 27 June, which the bank explained was driven by the “continuing uncertain situation in financial markets, the heightening of the sovereign debt crisis and the increasing regulatory burdens”.
Almost immediately, the possibility of a sale of part or whole of the €7bn Hypothekenbank Frankfurt balance sheet UK loan book was mooted – but this probability has always been low.
This is because any buyer, in part or in whole, of the predominantly performing UK loan book would logically require a discount to trade to a buyer, to reflect today’s average margins across the markets in which the property loans have been written in.
Even in the last 12 months, the acceleration in the average property loan margins has risen faster than many had expected. As a result, the average loan margin for Hypothekenbank Frankfurt’s UK loan book – or any other individual country book or indeed the aggregate European book – is out of synch with average margins.
The difference between the weighted average loan margins of the performing book and today’s average margins – which based on Deutsche Pfandbriefbank’s half-year results is 240 basis points across ‘mature’ Europe over the first half of 2012 – would be the basis for the discount calculation which any performing loan book buyer and Commerzbank would negotiate.
In all probability, the required discount price for a buyer to re-price old vintage loans at today’s margins would be steeper than Commerzbank would be prepared – or need – to accept.
Whether any would-be performing loan book builders have approached Commerzbank, discussions are likely to have been short.
Commerzbank is happy to play the long game, kick the can down the road and recover the maximum possible capital in an orderly run-off of the Hypothekenbank Frankfurt’s loan book over the coming five to seven years.
This approach contrasts with that of French investment bank Société Général, which is understood to be in the final stages of agreeing the sale of around €800m in performing predominantly French and German real estate loans to AXA Real Estate.
The nominal value of the loans to be sold has fluctuated since Société Général selected AXA Real Estate as its preferred buyer earlier this year, as revealed by CoStar News, as some a thrown out of the sale in protracted negotiations.
Commerzbank’s decision over the sale or run-down of the non-performing loan book has greater permutations.
In Hypothekenbank Frankfurt’s €7bn UK loan book, calculated on a Basel II exposure at default (EaD) basis, €140m, or 2% of legacy loans are above 100% LTV, with just €210m, or 3%, at between 80% and 100% LTV, according to Commerzbank at the end of June.
The majority of these €350m nominally-valued UK property loans are likely in at least some form of LTV covenant breach if not in default.
Across the entire €53bn European real estate loan book – including of €20bn in offices, €18bn in retail and €6bn in residential – €1.06bn, or 2% of all property loans were above 100% LTV at the end of June, while a further €1.59bn of European property loans are between 80% and 100% LTV.
This puts Hypothekenbank Frankfurt’s total European real estate loans at 80% LTV and above at €2.65bn – many of which will be in default, whether or not Commerzbank will accept discounts on those loans is another logical argument all together.