FRANKFURT-Following a ‘first wave’ of non-performing loans in Germany, a second is about to break as loans mature in 2011-2015 and these could bring up to $19 billion in volume into the marketplace for workout, Ruprecht Hellauer, managing partner of the structuring specialist Lohnbach Investment Partners here.

Hellauer said NPL trading activity increased over the last months. “These are either NPLs from the last wave - or little test balloons where banks have put together a couple of loans to just try to see and understand where the market is right now,” he said. “Broadly the institutions selling poorly performing assets fall into two groups - foreign banks, those without any strategic interest to stay in Germany and most motivated to run down their loan book and retrench to the home market and after this the German banks.”

Started in 2004, Lohnbach is funded by the management team and Grove International Partners, a private equity group. The Frankfurt firm arranges the acquisition and manages loans made against commercial property. It is currently working on some $754 million in face value, down from €1bn. Normally, portfolios are bought from banks via its investment vehicles at 40% to 50% of nominal value. PriceWaterhouseCoopers recently estimated NPLs on bank books in Germany were as high as $276 billion at end-2009. It cited Bundesbank data that see write-downs on loans of between $63 billion and $94 billion, mainly due to rising insolvencies.

“I hope we will be an even more active player in the next wave than before,” says Hellauer. “We were actually arranging the acquisition of non-performing loans up until April 2008, that’s what I call the first wave, before the NPL market became very slow in ’08-09. But it will become very active from 2011 or the end of this year until 2014-2015 - what I term the second wave… If you look at the roughly $377 billion commercial real estate balance sheet loans that German and foreign banks have altogether, and you assume that approximately 10% is going into default, that gives you about €38 billion commercial real estate NPLs in all. Let’s assume that 50% of that is going to trade, you have $19 billion coming onto the market.”

While recent NPL sales stemmed from difficulties encountered during loan terms, the second and more difficult phase will come when they reach maturity and face refinancing. “People expected that the first loans that had defaults or covenant breaches and things like that might turn into non-performing loans but this did not materialize because covenants were waived or extended… But what is unavoidable is maturity defaults. If the CMBS market is a guide, these maturity defaults will be seen between 2011 and 2014.”

Hellauer adds: “During the term of the loan you don’t worry if your equity is negative or positive as long as cash-flow is positive. Low interest rates have helped if you haven’t hedged but just bought a cap. But upon maturity, you have negative equity; you are either trying to buy the loan from the bank and restructure at a lower rate, but you will be very reluctant to put up additional equity especially when the valuation of the underlying collateral has dropped. In these cases, an 80% to 90% LTV loan has turned into a 100%-plus LTV loan. After having lost the original equity borrowers will be faced with having to put up significant fresh equity to have the loan re-financed at current LTV levels - and that will not happen for certain loans. At that point, the banks will first see if the equity is gone and also if the borrower might be gone as well since he is not willing to put up additional money and the loan will turn non-performing. If so, they will certainly be in selling mood.”

Allan Saunderson is a managing editor of Property Investor Europe and a contributor to GlobeSt.com.

Instant Insights /

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