23 March 2012 | By Claire Ruckin
Article from International Financing Review
Banks are stepping up efforts to reduce bloated loan books to take advantage of the market’s demand-supply imbalance and investors’ appetite to deploy cash, with £720m-equivalent of leveraged loans put up for sale last week from banks including Lloyds and RBS.
“It is a good time to sell because the levels are quite high at the moment. It is a good chance to cut risk,” one trader said.
Europe’s top 40 leveraged loans rose dramatically in the first quarter of 2012 as technical conditions pushed up prices to 95.41% of face value, compared with 90.88 on January 3.
“There is an awful lot of debt in Lloyds that is performing badly and £500m is a fraction of what it could sell”
Last week, Lloyds agreed to sell a £500m portfolio of mostly UK leveraged loans to Bain Capital’s credit investment arm Sankaty Advisers, while RBS is in the market with £152m-equivalent portfolio of leveraged loans. An €85m-equivalent sale of legacy Lehman Brothers’ loans is also attracting investor interest.
“Funds have cash to spend. They can’t sit on the money forever, otherwise they will lose it. There will be more of this to come,” another trader said.
The 26 loans Lloyds is selling to Sankaty include Four Seasons and the West Cornwall Pasty Company paper. The trades are taking place at heavily discounted prices but will chip away at the bank’s planned sale of its £141bn book of non-core loans, as it seeks to reduce doubled-up loan exposure following its merger with Bank of Scotland in September 2008.
“Sankaty is interested in small and mid-market names and is aiming to fill the void being created by the likes of Lloyds, RBS and Barclays,” a banker said.
Lloyds is also looking for buyers for a US$10bn portfolio of shipping loans and is trying to sell other loans as it seeks to strengthen its financial position. The non-core portfolio consists of loans that do not deliver targeted returns, are high risk or may be distressed or sub-scale.
“This is the tip of the iceberg. It has so much to go. There is an awful lot of debt in Lloyds that is performing badly and £500m is a fraction of what it could sell,” another banker said.
Tougher rules
Banks have been hit with tougher rules that mean they have to set aside more capital against loans, making them more costly to hold and forcing dozens of lenders to sell assets as they struggle to deliver returns above their cost of capital.
RBS is auctioning £152m-equivalent of loans as part of its ongoing programme to reduce balance sheet exposure. The portfolio, which had an average bid price of 88.9% of par, according to Thomson Reuters, includes multi-currency, multi-jurisdictional positions in loans including Biffa, Boots, Doncasters, Formula One, PHS and Travelex. Bids were due last Friday.
An €85m-equivalent portfolio of loans from legacy Lehman Brothers was also in the market with bids due on the same day. The average bid on all the names was 90 cents on the euro.
These portfolio sales are attracting interest from private equity firms that branched out into debt investment initially as a way of financing their own deals. More recently, though, PE shops have come to view such deals as a new source of income and have beefed up their debt investment activities as banks – more reluctant to lend on new buyouts – sell off swathes of existing loans.
Some private equity groups such as Apollo Global Management and Oaktree Capital buy debt in the hope of seizing control of underperforming companies, while other buyers, such as Sankaty, prefer to buy and hold until pricing recovers or the loans mature.
“It feels like there is a lot of cash to spend out there. It is a good time to be selling, although I’m not sure if it is a good time to be buying,” an investor said.
Article from International Financing Review