US NEWS: Irish eyes smile on Lone Star

The Dallas-based private equity firm has beaten a slew of rivals, including Blackstone, to buy the largest sub- and nonperforming loan portfolio to hit the market since the start of the global financial crisis. PERE Magazine, September 2011 issue

The biggest loan portfolio sale to have taken place on US soil since the start of the credit crunch was determined late last month, just as PERE went to press. Far from being the sort of drawn-out process expected for such sizeable transactions, the offload by troubled Anglo Irish Bank of a $9.65 billion portfolio of US property loans was a strictly summer affair, starting with the circulation of a marketing document by brokerage firm Eastdil Secured in mid-July and culminating in an agreement to sell to three groups about six weeks later.

According to multiple reports, Anglo Irish Bank is expected to recoup between $7 billion and $8 billion for the loan portfolio, which comprises 248 performing, sub-performing and nonperforming loans, split into eight separate pools and made against a number of different property types. Winning bids for the performing loans, which comprise three pools valued at between $4 billion and $5 billion, came from Wells Fargo and JPMorgan Chase.

Of most interest to the readers of PERE, however, is the fact that Lone Star prevailed as the winner for the sub- and nonperforming component of the portfolio. The 148 loans – with a total balance of $5.13 billion, an average loan balance of $39 million and an average weighted maturity of 21 months, according to marketing documents – attracted many of the largest private equity real estate firms over the course of Anglo Irish Bank’s two-round bidding process.

Other bidders for the higher risk pools included The Blackstone Group, Cerberus Capital Management and TPG Capital, each of which teamed up with various partners interested in absorbing the performing portion of the portfolio. Of particular interest to these firms, as well as Lone Star, was a $2.26 billion pool of distressed office and industrial loans. One rival bidder, commenting on his firm’s failed bid, said: “Tough loss, but this is part of the business. Need to move on to the next one.”

Little information about Lone Star’s bid was available at press time, as the firm declined to comment. However, according to one of its rival bidders, the sort of discount to face value that many of the bidders originally had sought, particularly as the US economy faltered further towards the end of the process, was looking unlikely.

Indeed, there was speculation at the time that the loan portfolio hit the market of discounted pricing ranging from 50 cents to 80 cents on the dollar. “I don’t know how they made the numbers work with their higher cost of capital,” one source said, pointing to Lone Star’s requirement for opportunistic returns. “They bid very aggressively.”

A matter of weeks
When the sale process started, it appeared as though there was enough demand for sub- and nonperforming US real estate that the bank could be expected to sell off the bulk of the portfolio quickly and at close to face value. “There’s enough demand from the big boys in the private equity sector to buy off all these loans at once that Anglo Irish Bank won’t need to break it up,” said Dan Fasulo, managing director and head of research for data provider Real Capital Analytics, early in the process. “The underlying real estate is good, and that’s what is peaking everyone’s interest.”

However, US economic problems in the days following the debt ceiling standoff by the country’s opposing political parties at the end of July gave potential buyers pause for thought. Shortly before the first round of bids was due on 9 August, some firms like Westbrook Partners and Kohlberg Kravis Roberts bowed out, while others sought further significant discounts to the face value of the loans.

Whatever the ultimate discount negotiated by Lone Star, the sale caps off an active year for the Dallas-based private equity firm headed by John Grayken. Indeed, it closed on $5.5 billion in equity for its latest real estate fund, Lone Star Real Estate II, in June – the largest amount raised for opportunistic real estate investing in 2011 so far.

With Blackstone closing on $4 billion during its first round of capital-raising for its latest fund, however, Lone Star’s effort may well be eclipsed come year end. More of a surprise would be a bigger loan portfolio coming to market than that of Anglo Irish Bank.

Additional reporting by James Comtois