“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
No. 1 Grosvenor Crescent | London | SW1X 7EF
T: +44 (0) 203 170 7020
F: +44 (0) 203 170 7021
• 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
• Zaggora is working with financial institutions to manage their CRE
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
value of outstanding commercial mortgage‐backed securitisations 17% 19%
2014‐2018 14% 2010
• Across Europe there is an estimated € 109bn of maturing CRE debt in 2013 10%
2009/10 that cannot be refinanced with the same level of proceeds. 12% 2011
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
agreements, worth an estimated £15bn since 2007. 26% Loan wholly or
• The partners have over a 100 years experience in advising high profile
companies, individuals and governments on their real estate 40%
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
• 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%.
• 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
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
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
..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
l di bili
5 Appoint an
they solicit bids for the asset which will
inevitably be below market value.
Instruct real estate advisors
An alternative option is to 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
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.
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• 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
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
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 letting vacant space and improving
Summer 2009 5
Original purchase 100
price/value Original purchase price is
now in negative equity • ‘Significant risk transfer’ to Zaggora allows
Any and all upside above
the original loan value is for the bank to immediately release its
Loan value regulatory capital provision to the
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
(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
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
amortisation to the bank of increase in asset value
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
Chris Hancock Malcolm Bell
T: +44 (0) 203 170 7020 T: +44 (0) 203 170 7020
M: +44 (0) 790 171 5882 M: +44 (0) 771 192 6306
No. 1 Grosvenor Crescent
T: +44 (0) 203 170 7020
F: +44 (0) 203 170 7021
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