When Eurohypo sold a $760 million US property loan portfolio to a consortium led by The Blackstone Group last month, the German lender was implementing the latest incarnation of a plan to deal with its troubled balance sheet post-credit crunch. That plan initially saw Eurohypo steadily shrinking between now and 2014, including substantially reducing its US footprint. But in a surprise move, the real estate lender’s parent Commerzbank announced that Eurohypo was abruptly pulling out of real estate lending altogether.
Indeed, the lender has been quite active this year in offloading its US assets. In March, it was revealed that Eurohypo had put the portfolio of 13 performing floating-rate loans, which are secured by a pool of US office, retail, industrial and multifamily properties, on the sales block. Confirming the strategic push, a Eurohypo spokesman said at the time: “In line with Commerzbank’s strategy to reduce Eurohypo assets globally, the bank is seeking to reduce assets in the US.”
The following month, Eurohypo sought bidders for the assets and, in June, it announced that a consortium consisting of Blackstone, US Bancorp and Wells Fargo Bank had purchased the portfolio for a collective price of approximately $722 million, or about 95 cents on the dollar. The bulk of the loans in the portfolio are collateralised by assets in New York, with additional properties in San Francisco, Boston, Miami, Houston and Chicago.
Prior to that transaction, Eurohypo had sold a portfolio of nine commercial real estate loans with a total face value of $300 million at a discount to Blackstone in January. Although terms of the transaction were not disclosed, the loans in that portfolio comprised a mix of performing and nonperforming mortgages backed by $700 million of underlying hotel, office, retail and mixed-use properties in the US. Prior to these two sales, Eurohypo had held approximately $6 billion of commercial real estate loans in the US.
As one would expect, Eurohypo also has been decreasing its loan book in Europe and has restricted new core lending to just four main countries: Germany, France, Poland and Britain. The plan is to reduce activity in these markets to €25 billion by the end of 2013 and remain curtailed until the end of 2015. In 2011, the German lender’s loan portfolio was a reported €61.4 billion, down substantially from the €72 billion at the end of 2010. The bank’s current target is to reduce its real estate loan book to €60 billion by the end of 2012, signalling more sales to come.
As a condition of receiving €18 billion in bailout funds during the credit crunch, the European Union ordered Commerzbank to sell Eurohypo by 2014. However, in March of this year, the bank won approval to wind down its money-losing subsidiary instead of selling it. According to an announcement by Eurohypo and Commerzbank, the assets of the lender are to be separated into three divisions: two non-core platforms comprising public finance and most of its commercial property exposures and one core but “scaled down” commercial property lending platform, which previously lent in 29 markets.
Then, Commerzbank made a subsequent announcement declaring its intention to wind down Eurohypo faster than planned.
Commerzbank indicated Europe’s economic volatility and high capital and liquidity requirements of the Basel III banking regulations were key factors. “In view of the continuing uncertain situation on the financial markets, the heightening of the sovereign debt crisis and the increasing regulatory burdens, Commerzbank intends to accelerate the path it has already taken, with its focus on customer-centric and profitable core business, the minimisation of risks and a reduction in complexity. The board of managing directors has, therefore, decided to wind up the business areas Commercial Real Estate and Ship Finance in the course of time.”
The Commercial Real Estate and Ship Finance division is to be shifted to the new Non Core Assets group. “The essential reasons for this are the high capital and the rising liquidity requirements under Basel 3, and especially for long-term financing, as well as the strong cyclical fluctuations which are to be expected in the results in the future,” said Commerzbank managing board chairman Martin Blessing.
Eurohypo is to be renamed Hypothekenbank as part of the process.
Eurohypo was formed a little more than 10 years ago when Deutsche Bank, Commerzbank and Dresdner Bank merged their mortgage lenders. In 2005, Commerzbank bought out its rivals’ stakes for nearly €4.6 billion.
This article has been revised since its initial publication.