Distressed Asset Model


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A model to manage distressed assets of financial institutions with a focus on real estate.

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Distressed Asset Model

  1. 1. “the best time to plant a tree is 20 y p years ago,g the second best time is now” – African proverb Distressed Asset Model Strictly private and confidential Zaggora LLP No. 1 Grosvenor Crescent | London | SW1X 7EF T: +44 (0) 203 170 7020 F: +44 (0) 203 170 7021 www.zaggora.com 1
  2. 2. Zaggora LLP • Zaggora LLP is a real estate investment partnership managed by a The UK Commercial real estate market owes  team that have a wealth of successful experience in acquiring, the banks £225bn..... Aggregated value of outstanding debt (£bn) financing and managing commercial real estate (CRE) assets in the UK 250 and Europe. 200 150 100 • Zaggora is working with financial institutions to manage their CRE 50 exposures by understanding the structured credit, underlying 0 property asset and then working to preserve and maximise value. 99 00 01 02 03 04 05 06 07 08 • The total volume of outstanding UK CRE debt reached £247bn by the ...and a large part of it is due to be repaid this year... and a large part of it is due to be repaid this year end of 2007, comprising outstanding debt on balance sheets and the 2009 After 2018 value of outstanding commercial mortgage‐backed securitisations 17% 19% (CMBS). 2014‐2018 14% 2010 14% • Across Europe there is an estimated € 109bn of maturing CRE debt in 2013 10% 14% 2009/10 that cannot be refinanced with the same level of proceeds. 12% 2011 2012 In the UK alone, there is £43bn maturing in 2009, 75% of which is Proportion of debt due for repayment (all lenders %) concentrated to 12 lending banks. ...while the fall in property values means loans are already in breach of covenants • The fall in CRE values and weaker occupier markets has resulted in a Interest wholly or Primary causes of financial breach % six‐fold increase in the value of loans in breach of banking partly unpaid 21% agreements, worth an estimated £15bn since 2007. 26% Loan wholly or  Combination partly unpaid 10% • The partners have over a 100 years experience in advising high profile companies, individuals and governments on their real estate 40% Loan‐To‐Value portfolios having worked at Knight Frank, Nationwide, Allied Irish covenant has been  breached  Bank, Cushman & Wakefield, Savills, The Ability Group, JP Morgan, Rotch Property Group, RBS, Fortis Bank & SMPA. p y p, , Source: De Montfort University Summer 2009 2
  3. 3. Distressed Assets  Lender’s Dilemma • CRE lenders have an increasing number of non‐performing or defaulted loans in their portfolio against office, retail and leisure property assets in the UK and Europe. £43bn of loans against commercial property are maturing in 2009 in the UK alone that cannot be refinanced after a drop in CRE values by 20‐30%. Zaggora’s Solution • The collapse of the global credit market in September 2008 has caused a weakening of covenants in both borrowers and tenants a tenants, • By working with investors and commercial real estate fall in the value of property assets as investment yields have widened lenders, Zaggora is able to acquire assets and whole loans, and as trading assets have seen margins squeezed. re‐structuring defaulted or distressed property assets by bringing a fresh balance sheet, an experienced team of • The positive growth in the global economy since 2000 has meant that individuals and a unique skill set. commercial real estate l d i l l lenders h have h d hi had historically l i ll low i id incidences of arrears and defaults. • Zaggora works through a three stage process to manage‐out distressed assets by actively managing property assets to • Regulatory capital is impaired as financial institutions have to preserve and maximise value. provision for the full size of the loan by setting capital aside – reducing balance sheet capacity for new lending. • The value creation by Zaggora is entirely for investors with the aim of increasing and recovering lost value on the senior • The volume of distressed assets has overwhelmed many lenders as debt and to maximise both lender and shareholder value. they have coped with changing management and ownership structures since 2007 2007. • The unique combination of structured credit expertise as well as a granular knowledge of CRE assets and a track • Some lender’s recognise they have to now manage assets from their record in active asset management makes the Zaggora team balance sheet if they are to recover value from assets and to re‐build unique in the CRE market. their balance sheets. Summer 2009 3
  4. 4. Lender’s Options Commercial property lenders  Appoint an administrator have limited options once a loan  Some lenders choose to appoint an has defaulted or becomes  official administrator to sell a distressed significantly distressed....... asset where a borrower has defaulted. Administrators can be slow expensive slow, ..firstly, they have to commit  and are market driven. To this extent, capital from their balance sheet  against the entire loan size that  is defaulted..impairing new  lending capability l di bili 5 Appoint an  Administrator they solicit bids for the asset which will inevitably be below market value. Self‐manage assets  Instruct real estate advisors An alternative option is to self self‐ Some lenders, recognising the need Instruct a real  manage the asset using an in‐ for specialist property market estate advisory  Self‐manage  house team of specialist assistance, may instruct a property firm assets business recovery experts. management or real estate advisor such as Knight Frank or CBRE. In a normal market condition this is possible for 15‐20 assets These advisors can only manage at the across a portfolio, but not for property level and do not have the portfolios of hundred or specialist knowledge of credit thousands of distressed assets. structures and cash flow waterfalls. Sell loan into the  They are also not able to take the market asset onto their balance sheet which will assist most lenders regulatory Sell loan   capital requirements. Some lenders such as Merill Lynch have sold real estate loan portfolios. Often at a steep discount to par value. This can be a desperate measure and a recognition of their inability p p g y to manage defaulted assets. It could also be because of the severity of the distress. Summer 2009 4
  5. 5. Zaggora Process • Distress identification Zaggora works with financial institutions to identify and understand distressed commercial real estate in the portfolio. An asset management and business case strategy is developed and approved by the Asset lender on a case‐by‐case basis. Assets will vary from Management commercial office, retail, development and leisure ( (hotels, pubs). The credit structure is analysed. ,p ) y • Structuring The asset is acquired by Zaggora and re‐structured Structuring under new loan covenants that allows for the management of the underlying asset. This may involve moving the asset into a new corporate structure as well as lengthening the term on the Distress loan, re‐setting debt service coverage ratios and other covenants to allow flexibility. identification • Asset management Partner institutions Zaggora will then implement the agreed asset gg p g management plan for each property over 5‐7 years. This may involve improving lease terms with tenants, enhancing the physical quality of the asset via refurbishment, refurbishment letting vacant space and improving the marketing. Summer 2009 5
  6. 6. Structure 100% Original purchase  100 Benefits price/value Original purchase price is  now in negative equity  • ‘Significant risk transfer’ to Zaggora allows 90% 90 Any and all upside above  the original loan value is for  the bank to immediately release its Loan value regulatory capital provision to the 80% 80 The highest tranche of the  the benefit of investors senior loan is distressed as  impaired portion of the loan. In the case the asset value has  of UK institutions participating in the APS 70% 70 dropped and is at 100‐ scheme, there is no 10% loss but 5% Current market value ‐value scale 120% LTV 120% LTV (because of write off) 60% Zaggora acquires the asset  60 at face value and offers  • Property asset is moved to Zaggora the bank real amortisation  Zaggora takes ownership of  50% of up to 10% of face value  Reset‐value investment company to be managed by a 50 the equity for £1 and  capable and experienced property team p p p p y Loan‐to‐ of the loan. of the loan warehouses asset off bank  h ff b k Zaggora works to  balance sheet and works to  manage the asset and to  that will actively manage assets. 40% The bank writes off 50% of  40 increase the value through  increase the value. this new equity from the  active asset management • Recovery of value over time through loan. Given the default  30% 30 intensive and active asset management of Zaggora pays down real  gg p y leverage of 90/10, an  g f / , real estate Running yield for investors up estate. amortisation to the bank of  increase in asset value  20% 20 up to 10% of face value. of 10% shows 100% on  to 10% of equity and 2x to 3x equity ‘equity’ multiple target at exit. 10% 10 In exchange, the bank  writes off 50% of the new  equity from the loan and we  equity from the loan and we 0% 0 re‐set the loan covenants  and extend loan term. Defaulted bank capital  After transfer bank capital  Providing capital  provision RWA= full £85ml provision RWA = >£85ml from balance sheet to support new lending t l di Summer 2009 6
  7. 7. Contacts Chris Hancock                                                               Malcolm Bell chris.hancock@zaggora.com                                     malcolm.bell@zaggora.com T: +44 (0) 203 170 7020 T: +44 (0) 203 170 7020 M: +44 (0) 790 171 5882                                           M: +44 (0) 771 192 6306 Zaggora LLP No. 1 Grosvenor Crescent London  SW1X 7EF T: +44 (0) 203 170 7020 F: +44 (0) 203 170 7021 ( ) Notice This memorandum was prepared by Zaggora LLP. This document is for information purposes only and should not be construed as a solicitation or offer, or recommendation to acquire or dispose of any investment in real estate assets or securities or any other transaction. Whilst all reasonable efforts have been made to obtain information from sources believed to be reliable, no representations are made that the information or opinions contained in this term sheet are accurate or reliable. Nothing in this document constitutes investment, legal, accounting or financial or other advice. Any investment decision should only be made after consultation of professional advisers. Zaggora LLP is not authorised or regulated by the Financial Services Authority and does not promote, give investment advice on or make arrangements in financial instruments. This presentation does not constitute an offer to invest. Summer 2009 7