Royal Bank of Scotland is to offload £1.4bn of high-risk UK commercial property loans into a structure controlled by Blackstone, the private equity group, as it works through the legacy of profligate lending during the boom years of the market.
The deal will be the largest such disposal of UK commercial property debt, and has been structured in a complex form that will allow the state-owned bank to retain a share of future profits and avoid taking the hit from selling at a distressed price.
Blackstone, which saw off rival bids from Lone Star, Westbrook with KKR, and Starwood, will buy a minority position but will assume the management of the portfolio from RBS.
The portfolio comprises some of the most problematic property loans in the bank’s “non-core” division, which is headed by Rory Cullinan. The deal will be one of the most significant steps by the bank towards offloading troubled debt arranged during the boom.
The portfolio includes performing but high loan-to-value debt as well as those that back a number of so-called “opco-propco” splits, where a business sells its properties and leases them back.
The eagerly awaited decision was made this week but has not yet been given the final sign-off from the bank’s senior executives. RBS and Blackstone declined to comment last night.
RBS was the second-largest lender to the commercial property sector, but has been forced to make heavy impairments to its overall loan book of £80bn after the property price crash wiped the value of many properties to near or below the level of debt. There is about £42bn of real estate debt in the “non-core” division part of the bank.
The £1.4bn portfolio mostly comprises debt with loan-to- value ratios of more than 90 per cent. These loans require active management and working with borrowers on either restructuring or a sale of assets.
Blackstone has extensive experience in dealing with such loans, particularly in the US. It is understood the rate of return is expected to be 12-15 per cent for Blackstone and RBS, although profit is dependent on driving value from the portfolio.
The decision to pick Blackstone as a partner on the portfolio comes after more than a year of talks with private equity groups, underlining how complicated the process has been.
There will be about 60 per cent of external debt brought into a new vehicle that will own the loans. The bank will keep a majority share of the remaining equity, although it is expected to offer more to other institutional investors in the future.
The portfolio will remain on its balance sheet until it has sold its equity stake below 50 per cent.
Lazard and Berwin Leighton Paisner advised the bank.