Lloyds Banking Group has stepped up efforts to shrink its balance sheet by agreeing to sell a £500m portfolio of mostly UK leveraged loans for private equity buyouts to the debt investment arm of Bain Capital, according to people familiar with the matter.
The UK bank has already sold several large portfolios of distressed debts from its Business Support Unit, or bad bank, as it seeks to restructure and shed its £67bn book of non-performing loans.
Lloyds and HBOS, which it bought in 2008, were among the biggest providers of leveraged loans to UK private equity deals during the buyout bubble, which burst when the financial crisis started in 2007.
The bank’s deal with Bain’s Sankaty unit is for only 26 loans, a few of which are performing, but many are distressed.
Overall, the loans have a £500m face value, but were acquired at a “significant discount”, according to a person close to the sale who declined to give an average price. The relatively modest number of loans in the sale has also allowed Sankaty to value each individually.
Lloyds has started to meet the borrowers “to minimise the effect this will have on them”, according to another person close to the deal.
The bank expects the sale to be finalised in April.
Sankaty, based in Boston, has about $16bn under management, and specialises in leveraged loans, high yield bonds and distressed debt. It plans to work closely with the borrowers to maximise recoveries, rather than sell individual loans on to other debt investors, according to the person close to the deal.
Distressed debt investors, including Apollo Global Management, Oaktree Capital Management, Strategic Value Partners, Centerbridge and Baupost, have either set up new European offices or beefed up their presence, in the expectation of a flurry of loan sales by continental lenders.
Fund executives and distressed debt traders say activity has been relatively muted, due to the reluctance of European banks to sell loans at a steep discount – which in some cases would entail a loss for the seller.
Some people say that the European Central Bank’s disbursement of €1tn of cheap loans to financial institutions will markedly ease pressures for European banks to shrink their balance sheet. This may give banks more time to generate capital through operations rather than asset sales.
The bailed out or partially nationalised banks in Ireland and the UK are exceptions, and have shed several sizeable loan portfolios after marking down the value of their loan portfolios further than their continental counterparts.
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