€4bn ex-Eurohypo loan sale may ease pressure on Commerzbank

Germany’s second largest bank Commerzbank has been more in the headlines recently for losing in its attempt to overturn a London High Court order, compelling it to pay out more than €50m in bonuses to its ex-Dresdner Kleinwort staff after a protracted legal battle.

Matters haven’t been helped by the ongoing slump in the share price, fuelled by the bank’s plan for a further capital increase, its fifth in four years. The shares have tumbled 93% since the start of the financial crisis, the worst performance of any European bank outside Ireland and Greece, as a number of analysts have noted.

Meanwhile, the gritty business of finding a buyer for its ex-Eurohypo subsidiary’s loan book grinds on, and we reported in a recent issue that Wells Fargo was to the fore in bidding for the ₤4 billion (€5.2bn) UK loan book, consisting of 70 separate loans. Media reports from, among others, the Financial Times newspaper and news agency CoStar Finance claim that Commerzbank is now negotiating only with Wells Fargo and private equity group Lone Star, and a deal will be conclusively announced imminently. It is likely to be the biggest mortgage loan sale in Europe since the onset of the financial crisis.

Rival bidders including Blackstone, Starwood Capital, Allianz subsidiary Pimco, and Apollo have now departed the scene, while the details of the massive loan sale to the new buyers are worked out. As it stands, Wells Fargo are poised to take over the performing loans, making up about three-quarters of the total, while Lone Star will take the remaining non-performing loans.

Analysts believe the discount on the old Eurohypo portfolio is likely to be less that that which other bulk sellers, such as Lloyds, Anglo Irish Bank, and Allied Irish Banks have accepted to shift their unwanted loans off their books. The best-quality Eurohypo loans are likely to be discounted by about 10%, while impaired loans will probably see a 25% discount, which means Commerzbank may raise about ₤3.4bn in proceeds.

Wells Fargo and Blackstone bought ex-Eurohypo loans in the US last year for $560m, but Hypothekenbank Frankfurt, the renamed Eurohypo within Commerzbank, still has about €50bn in commercial property loans outstanding, along with about €80bn of public finance exposure. Selling off these loans is critical for Commerzbank’s rehabilitation and to lay the groundwork for any sort of recovery, starting with halting the huge slide in the bank’s investor confidence.