Lone Star to buy £540m Irish mortgage business

The purchase includes a banking licence which will enable the investment firm to lend in Ireland.

US private equity firm Lone Star has agreed to buy Irish intermediated mortgage business Start Mortgage with assets of £540 million (€676.7 million; $876.2 million) from South African-based investment bank Investec.

Lone Star will acquire an Irish banking licence for the first time through the acquisition enabling it to lend in Ireland, an industry source said.

The Dallas-headquartered firm has been the biggest buyer of property-backed loan books in Ireland this year. It purchased the majority of the Irish Bank Resolution Corporation portfolios sold in the first half of this year, the largest of which were the Project Rock and Project Salt loan books of primarily UK and Irish commercial property-backed loans with a par value of around €7 billion. It has also bought sizeable loan books from the National Asset Management Agency, the ‘bad bank’ set up to manage problems arising from Ireland’s property lending boom, and Allied Irish Bank.

The Start transaction is one of the biggest residential portfolios Lone Star has bought in Ireland. It is also the first time the firm, led by founder John Grayken (pictured), has bought a business in Ireland that could potentially lead it to challenge the country’s pillar banks, dealing still with internal issues post-crisis and whose lending has been hampered as a result.

Ireland currently has amongst some of the highest mortgage margin rates in Europe hence there is an opportunity for other lenders to enter the market, commented the industry source.

The purchase of Start, which is the Irish arm of UK mortgage firm Kensington Group, includes its mortgage origination platform, brand, operations and employees, of which there are around 70. It also includes all of Start and certain other Irish mortgage-related financial assets and liabilities, according to an Irish Stock Exchange announcement. The company reported a loss before taxation of £21 million as at 31 March 2014. The Start assets after impairment were valued at £474 million with impairment estimated to be £154 million, according to Investec’s annual report for the year ended 31 March 2014.

Investec’s funding line of approximately £270 million, as of the same date, is to be repaid entirely at completion of the deal. It’s thought that Lone Star will need to arrange its own funding line for when the deal is completed, expected by year end and subject to regulatory approval. The purchase price was undisclosed but a source with knowledge of the transaction said that it was sold at £80 million discount to net asset value.

The sale comes just one week after Investec sold the UK arm of Kensington to other US private equity groups Blackstone and TPG for £180 million.

Investec said that the transaction with an indirect affiliate of Lone Star Fund IX “supports Investec’s strategic objective to simplify and reshape its specialist banking business and together with the sale of Kensington Group (still subject to approval) substantially reduces the assets within its legacy non-core business.”

As part of the deal, Start’s staff of 70 people will transition with the business and continue to manage a total loan portfolio estimated to be around €1 billion, comprised of loans that have been sold but continue to be managed by the company, it’s understood. The existing contractual rights and repayment obligations of current mortgage customers will remain unchanged, according to the Start website.

Lone Star declined to comment. Investec declined to comment beyond the statement.