Aviva has narrowed the search for a buyer for its final clean up trade of legacy UK commercial property loans in the £2.7bn Project Churchill portfolio, secured by just over 1,000 UK commercial properties, to three US private equity firms.
CoStar News has learned that Apollo Global Management, Lone Star and Cerberus Capital Management have all progressed to the final stage.
Two separate joint venture bids by Oaktree Capital Management with JPMorgan and Varde Partners with Macquarie Bank both narrowly missed out on the final round.
Deloitte is selling Project Churchill on behalf of Aviva. The deadline for binding bids has been extended to mid-August, given the scale of the necessary due diligence on the loan portfolio.
Project Churchill is comprised of four tranches after a fourth circa £100m defaulted tranche was added just days ahead of the indicative bid deadline of 29 June.
The total unpaid principal balance (UPB) of Project Churchill is approximately £2.7bn, secured by around 1,020 UK commercial properties.
The underlying property portfolio spans distribution warehouses, care homes, department stores, multi-let retail, office and industrial properties, shopping centres, a Rolls Royce depot as well as central London and regional office centres.
The aggregate valuation across all four tranches is approximately £2.4bn, which implies a blended LTV across Project Churchill of above 112%. The valuations were carried out in separate pools by DTZ, CBRE and JLL and are all dated March 2015.
Project Churchill, comprised of loans extended to more than 270 borrowers, breaks down into performing, sub and defaulted loans. Just over half the loan portfolio by total unpaid balance – £1.4bn or almost 52% – is in default.
Project Churchill is expected to trade for a single digit discount to the current market value of the circa 1,020 UK commercial properties, implying a purchase price in the £2.2bn to £2.3bn range. The discount to unpaid principal balance is likely to be around 15%, plus or minus in either direction.
Given the scale of the underlying property portfolio, early secondary sales are possible as well as acquisition financing for the majority of Project Churchill loans tranches.
Three of Project Churchill’s four tranches account for 96% of the portfolio by UPB. These major tranches are comprised as follows:
- Tranche A: the high-yielding performing loan tranche with an UPB of £1.17bn, secured by 483 properties valued at £1.29bn, which reflects a 90.9% blended LTV from 198 separate borrowers. There is also a £250.5m notional claim for early repayment fees (ERFs). Net operating income (NOI) is £96.2m, reflecting a net initial yield (NIY) of 7.5%. Average WAULT is 15.4 years. The dominant sector weighting is retail, which reflects 53.8% by UPB. By geography, there is a 35.3% weighting to London and the South East. The 10 largest assets by current market value reflect £374.1m, or 29%, of the entire tranche. Assets also include modern distribution units let to tenants such as Debenhams, Argos and DSG. There is also a portfolio of care homes and a House of Fraser department store in Wolverhampton with a 25 year remaining lease. The weighted average all-in cost of debt is 5.9%.
- Tranche B: a £527.9m non and sub-performing loan pool advanced to 25 separate borrowers and secured by 209 properties valued at £459.7m. There is an additional notional £123.9m claim for ERFs. Just under half of the tranche by UPB is secured against retail assets with 45% in London and the South East. There is also a portfolio of care homes and multi-let mixed-use properties. The 10 largest assets by market value account for £182.5m of the tranche. NOI is £35.5m, reflecting a NIY of 7.7%, while the average WAULT is 13.5 years. The majority of the loans are in some form of insolvency. The weighted average all-in cost of debt is 5.9%.
- Tranche C: an entirely defaulted tranche with an UPB of £913.6m advanced to 47 borrowers and secured by 305 commercial properties valued at £594m, reflecting a blended LTV of 153.8%. This is the only tranche offered as a loan or direct asset pool as the majority of loans have already been enforced. Retail assets account for £376m of the tranche by market value and the London and South East weighting is 46.7%. NOI is £40.1m, reflecting a NIY of 6.8%. Average WAULT is 4.7 years. Assets include a Chesterfield shopping centre, a Sainsbury’s supermarket in Hemel Hempstead and a Rolls Royce depot in Derby. There are also a number of high profile assets in regional office centres and central London. The weighted average all-in cost of debt is 6.2%.
All parties declined to comment.