Resurgence in M&A market helps Lone Star shed DüssHyp

US private equity investor Lone Star has sold its second German real estate financing bank, Düsseldorfer Hypothekenbank (DüssHyp) to a consortium for an undisclosed price. The deal follows on the heels of its sale of Corealcredit Bank in Frankfurt to neighbouring Aareal Bank at the end of last year. The deal is the largest German bank takeover since the onset of the financial crisis.

The buyer is a consortium headed by London investment group Attestor Capital LLP and investment banker Dr. Patrick Bettscheider. The new owners plan to convert the mandatory convertible bonds in the bank into permanent equity capital, and to boost the core capital position of the bank, while continuing to run DüssHyp as a going concern.

Attestor manages $1.5bn assets for investors (according to the sparse information available on the company), while prominent wheeler-dealer Bettschneider recently sold out of Frankfurt-based MainFirst, a boutique investment bank he co-founded in 2011, to establish Swiss-based Interritus with former Commerzbank director Ulrich Sieber. The buying consortium completed the deal with Lone Star through holding company Ocean Holding. Both parties are thought to be holding equal shares of 45%.

Founded in 1997, DüssHyp is a small (€12bn balance sheet) Pfandbrief-issuing bank specialising in financing residential properties, offices, hotels, logistics and parking with mortgage small bond loans in the region of €10-50m. It also engages in syndicated loans with other lenders.

Lone Star rode in to rescue DüssHyp in 2010 in the midst of the financial crisis after the ailing Düsseldorfer bank had been absorbed in 2008 for safe keeping by the BdB Association of German Banks’ special protection unit. The BdB subsequently brought in further help from government bailout fund SoFFin, to protect the integrity of both DüssHyp’s deposit insurance and its Pfandbriefe.

Lone Star is thought to have injected more than €500m to strengthen the core capital position of the bank. DüssHyp has continued to make losses, however, with the latest figure €25.9m of losses for the first half of this year, after full-year losses in 2013 of €60m and €86m in 2012. The core capital position remained weak, reaching 8.5% at end-2012 – only just averting intervention by Germany’s financial watchdog BaFin had it reached the critical level of 8.0%. By end-2013 it had recovered to reach 13%

Lone Star has been continuously reducing DüssHyp’s balance sheet, particularly its public financing book which has been shrunk from its then €17bn to €6.4bn now. The bank has a commercial property loan book of €1.2bn, of which approximately €200m is underwriting US property deals, southern European loans, or securitisations which it no longer wants. While these are likely to be shed, DüssHyp does want to expand its domestic property lending, along with lending into markets like the Netherlands and larger cities in France and Spain. It doubled new business lending in these areas in the first half-year to €260m, including extensions.

Lone Star still owns a further two German banks – the stricken Düsseldorf industrial lender IKB and the Frankfurt-based MHB Bank. It may be hoping that the recent resurgence in German banking M&A activity may also help to smooth a path to exit for those holdings as well. Recent merger deals include the BNP Paribas takeover of Munich-based online broker DAB, and ABN-AMRO’s subsidiary Bethmann Bank’s takeover of Credit Suisse’s German private client business.