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Cerberus pays £352m for Lloyds Project Avon

Cerberus Capital Management signed contracts last night to acquire the Project Avon UK commercial real estate loan portfolio from Lloyds Banking Group for £352m.

Project Avon’s remaining balance, after selling the loans by five UK regional high-tech fire control centres (FCCs) to Kennedy Wilson Europe Real Estate (KWE), was £536m implying Cerberus’ discount to gross liabilities was 34.3%.

Underbidders were Oaktree Capital Management and KWE.

Cerberus will close Avon on an all-cash basis and begin speaking with potential loan-on-loan financiers today.

In a statement to the Stock Exchange, Lloyds reported this morning: “The gross assets subject to the transaction are £536m and generated a loss of £17m in the year to 31 December 2013. The sale proceeds will be used for general corporate purposes and the transaction is not expected to have a material impact on the Group, including on its capital position, due to existing provisions taken against these assets.”

The transaction is expected to complete in the second half of 2014.

Cerberus, whose European real estate division is headed by managing director Ron Rawald, has been the dominant winner of Lloyds legacy commercial real estate portfolios.

Last year, Cerberus won the two major Project Hampton sub-portfolios, projects Bravo and Charlie for a combined €1.03bn, in the largest Continental European loan portfolio sale of 2013, as well as projects Indie, Thames and part of East, the German, UK real estate and UK hotel loan portfolios respectively.

In addition, Lloyds sold Cerberus the Admiral Taverns pub chain for around £200m in January 2013.

More recently, in April this year Cerberus beat PIMCO to win NAMA’s Northern Irish loan book of Northern Ireland borrowers’ loans domestically and overseas, paying just over £1.1bn for the £4.5bn Project Eagle portfolio.

Project Avon has remaining gross unpaid balance of £533.4m, against a remaining current real estate value of £400.4m across 268 properties.

However, Avon includes two syndicated tranches over four loans which reduce Lloyds’ share to £369.4m, which reflects a portfolio LTV of 144.4%.

The remaining Project Avon, comprised of 43 loans over 23 borrowers secured by 268 UK-wide commercial properties, generates an annual net operating income of £22.2m.

By geography, Project Avon’s assets include 89 properties in Scotland, 66 in London, 29 in the North West, 18 in the South West, 15 in both the East of England and East Midlands, 12 in the South East and a balance of 25 spread throughout the remaining regions.

Within the regional segments, the 170 properties across Scotland, London and the East of England represent £233.4m of Project Avon’s remaining £369.4m real estate value, after factoring in syndicated loan reductions.

By sector, Project Avon’s assets include 187 residential properties, valued at £118m; 24 offices, valued at £72.9m; 17 mixed-use properties, valued at £32.7m; 13 retail properties, valued at £19.5m, eight industrial properties, valued at £29.7m, with the seven remaining assets comprising the £32.1m balance.

Deloitte, which was mandated to sell Project Avon on behalf of Lloyds, has sold the tranche separately from the remaining loan portfolio because the FCC portfolio, which was placed into administration in March 2012, had live fully funded offer prior to the launch of the loan portfolio sale process.

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