Commerzbank secures multi-billion dollar mortgage sale
Frankfurt (Reuters) – Commerzbank is taking a big step forward in winding down its legacy assets, selling the remains of its former mortgage subsidiary Eurohypo in Britain, which has been in the shop window for some time, to U.S. major bank Wells Fargo and financial investor Lone Star.
At issue are five billion euros worth of mostly well-performing commercial real estate loans, as well as the entire operating business on the island, Commerzbank said Monday. It's one of the biggest deals the European real estate sector has seen since the financial crisis.
The news gave a boost to the beleaguered Commerzbank share at the start of the week, with the stock up almost four percent. Shortly before, the share was the biggest winner on the Dax, after media reports at the weekend stated that the German government, as a major shareholder, was for the first time exploring concrete exit options.
The mortgage sale in the UK comes as no surprise. Financial circles had already leaked out in April that Wells Fargo and Lone Star were on the verge of winning the bid. Commerzbank, which has been weak in terms of earnings, decided about a year ago to withdraw completely from capital-consuming commercial real estate financing and to wind up its subsidiary Eurohypo (now Hypothekenbank Frankfurt). It was pushed into the group's own "bad bank". Government bonds and large-volume real estate loans, some with very long maturities, are now stored there. They can either be held to maturity or sold to protect the balance sheet. The smallest discounts are usually on loans that service interest and repayments.
This is largely the case with the UK portfolio, which is now changing hands including 50 employees. Accordingly, the discount that Wells Fargo and Lone Star were able to push through as a syndicate was small: It was just 3.5 percent. The volume of non-performing loans in the package is 1.2 billion euros – they are going to Lone Star because the financial investor specializes in these cases. Wells Fargo, now the largest real estate financier in the USA and on an expansion course in the UK, takes over the healthy parts.
For a long time, due to the financial and debt crisis, there had been virtually no movement in the market because the price expectations of buyers and sellers were too far apart. That is now changing, as Sascha Klaus, the Commerzbank divisional board member responsible, explained in an interview published on the bank's intranet: "Expected returns have already fallen due to the high liquidity in certain markets." For the Eurohypo platform in Great Britain there had been a great demand especially from strategic investors.
The price discount for the package will lead to a charge of 179 million euros against earnings at Commerzbank in the current year because write-downs will be due. Conversely, equity of 133 million euros is released, but this does not have a significant impact on the bank's core capital ratio. "Overall, the transaction should be assessed neutrally," explained analyst Guido Hoymann from Bankhaus Metzler. Commerzbank, however, is making faster progress in winding down its "bad bank" than originally thought: Previously, the volume of the NCA wind-down unit was expected to shrink to EUR 93 billion by the end of 2016, but now there is talk of "well below 90 billion".