Anglo Irish Bank protest
The auction of Anglo Irish Bank’s troubled $9.5 billion U.S. loan portfolio has surprised some industry observers — and spread fear among some borrowers, who worry about having new lenders take over their troubled projects.
Ben Thypin, a senior market analyst at Real Capital Analytics, said the fact that three lenders divvied up Anglo Irish’s portfolio was” not particularly unexpected.”
“No one but a bank could really afford to buy the performing loans, so the performers and non performers inevitably went to different buyers,” he said.
But what was surprising was who ended up at the winners’ table — Lone Star Funds acquired about $5 billion in sub- and nonperforming loans, while Wells Fargo and JPMorgan Chase acquired the remaining performing loans in separate transactions.
The surprise stems from the fact that nearly every major investment bank and private equity firm in the country (including the Blackstone Group, TPG Capital and Goldman Sachs) was initially in line to evaluate the portfolio — the biggest such sale in the U.S. in years.
The conventional thinking was that a larger private equity firm would acquire the distressed assets, and that commercial banks with retail arms, like JPMorgan and Wells, would shy away from such a large foreign loan portfolio altogether.
But in the end, sources say, a lot of those high-profile private equity players came to the table hoping to negotiate steep discounts on the bank’s distressed assets, with the intended goal of flipping the properties for a quick profit. Yet sources familiar with the auction process said the goal of the auction was clear: to maximize revenue at all costs.
“A lot of the people dropped out once the brokers told them where the pricing was,” said Eric Anton, who left Eastern Consolidated last month and is now at Brookfield Financial. Anton, who crunched the numbers for clients who ended up not bidding, pointed out that the portfolio was priced before the U.S. debt ceiling debate began to rattle global stock markets.
“At the end of the day, they wound up doing like a three-corner pool shot,” Anton said, referring to the three buyers.
That three-corner shot comes nearly three years after Anglo Irish’s longtime chairman, Sean FitzPatrick, resigned in 2008 over the revelation of secret loan transfers, which were intended to make the bank look healthier than it was. The bank, however, was experiencing record losses, and in 2009 was taken over by the Irish government.
Just before the Anglo Irish auction took place in August, rival lender Allied Irish Bank had agreed to sell about $1 billion in loans to Wells Fargo and the Blackstone Group. In that deal, Allied reportedly gave the buyers up to 15 percent off the face value of the loans, and the two buyers took equal splits of the total loan portfolio.
So it came as a surprise to observers that Wells Fargo, which had just committed to Allied, went after Anglo’s portfolio as well.
Meanwhile, many in the industry expected the distressed portion of Anglo’s portfolio to be snapped up by a New York-based private equity firm with widespread name recognition, rather than by a smaller private equity firm like Lone Star, which is based in Dallas.
But Lone Star is known to have treaded in risky waters before. In 2003, the firm acquired a majority stake in Korea Exchange Bank for $1.2 billion, and sold its stake in late 2010 for about $4.1 billion. And in the spring, Lone Star had also expressed an interest in $1.6 billion in Spanish real estate assets being auctioned off by the Royal Bank of Scotland.
Closely chronicled
Anglo’s lending, of course, has been closely chronicled by The Real Deal since the real estate boom, when the bank became one of the most aggressive foreign lenders in the U.S., approving billions of dollars in commercial real estate loans that later soured.
Anglo Irish lost nearly $25 billion in 2010, and by August of this year it reported that nearly 80 percent of its loan portfolio worldwide was “at risk” — a category that includes impaired loans, loans that are past due but not impaired, and loans that are “lower quality.”
In New York alone, it was involved in some of the more disastrous deals in the city’s recent history, including developer Yair Levy’s Rector Square, which was sold at a foreclosure auction, as well as the Mark Hotel, where Anglo sold its $300 million debt to Dune Real Estate Partners for $190 million earlier this year.
But following the bank’s takeover by the Irish government, the new management team moved aggressively to resolve many of its troubled assets by selling foreclosures. As part of the restructuring of the Irish banking system, which started in 2009, Anglo Irish recently merged with the Irish Nationwide Building Society, a lender, and was forced to sell off its U.S. and U.K. holdings.
In early 2011, that deleveraging process began when Anglo Irish, which is now headed by chairman Alan Dukes, retained the commercial brokerage Eastdil Secured (see related story here) and commercial real estate capital intermediary Holliday Fenoglio Fowler to assess how much it could generate through a sale of its more-than-600-property U.S. loan portfolio.
By early June, Eastdil was announced as the broker that would market the sale of the $9.5 billion loan book. Mike Aynsley, group chief executive at Anglo Irish Bank, had this to say in an August report to shareholders about the sale: “The bank’s primary focus remains the orderly workout of the loan book while minimizing losses to the [Irish] taxpayer and maximizing returns on its portfolio.”
Anger spreads
One of the concerns weighing heavily on Anglo Irish is the reaction of its bondholders, who face the prospect of seeing a majority of their investments wiped out in a restructuring plan. Those bondholders, and Anglo’s other borrowers, are already entering into litigation battles over the Anglo Irish portfolio auction.
For example, Fir Tree Capital, a Manhattan-based hedge fund that holds $200 million in Anglo Irish subordinate bonds, filed suit in U.S. District Court earlier this year, asking a federal judge to halt the Anglo Irish loan sale until a payoff could either be guaranteed by the bank, or by the parties that purchased the bank’s assets. While the sale is expected to close before the end of the year, it’s unclear how bondholders will be compensated, and the suit is still pending.
Meanwhile, Anglo Irish borrower Africa Israel also filed suit against the bank, alleging that the sale of the building’s loan to Lone Star violates a rare provision it hammered out with the bank when it restructured the $385 million senior loan at the Apthorp in June 2010.
The Apthorp developers argue that the agreement contained a provision that Anglo would not sell the note, and would continue to hold a 51 percent stake in the loan.
“This bargained-for right was important to Apthorp to prevent against an unsuitable lender gaining control of the senior loan and to provide certainty to the project,”Fried Frank attorney Gregg Weiner, representing the Apthorp developers, wrote in court filings.
A court date on the temporary restraining order is scheduled for Oct. 12.
In addition, bad deals from as early as 2006 are still haunting the bank.
Former Tishman Hotels managing director Timothy Haskin sued Anglo Irish earlier this year over two Manhattan properties that sources say are part of the bank’s distressed loan portfolio — the Eastgate Tower Hotel at 222 East 49th Street and the landmark Beekman Tower Hotel at 3 Mitchell Place.
According to court documents filed by Haskin, Anglo invested about $48 million from its private banking clients based in Ireland, but later refused to fund the hotel renovations.
In 2009, the Irish investors requested that Haskin’s firm be removed as the general partner, prompting him to sue. The arbitrator ruled in favor of the bank on June 2 of this year. Meanwhile, investors in the partnership have sued Anglo for fraud in Ireland in connection with the venture.
Insiders will be watching that case and, more broadly, the overall fallout of the three-pronged sale, to see whether it just reshuffles bad business deals or jump starts the struggling commercial market in the U.S.
“The Anglo Irish portfolio was huge, by far the biggest portfolio of loans that had hit the market in quite a while,” said Matthew Anderson, a managing director at Trepp, the New York-based commercial real estate research firm.
Lone Star and JPMorgan did not return calls for comment. A spokesman for Wells Fargo declined to comment.