PE Panorama: Still value in Europe’s sovereign debt crisis

04 August 2014   Category: News, Global, USA, Europe, Spain   By Paul Mackintosh

American private equity giant the Blackstone Group has just pulled off one of the largest financial services deals in recent Western private equity, while demonstrating, for better or worse, that there is still value to be found in the detritus of the European sovereign debt crisis. This was the purchase of a 6.4 billion euros (US$8.7 billion) portfolio of mortgages from distressed Spanish local bank CatalunyaCaixa SA, at a cost of just 3.6 billion euros. Blackstone won the deal in a competitive auction that commenced with 12 funds, of which four made it through to the final rounds. According to reports in Bloomberg and elsewhere, Blackstone won out over a field including Cerberus Capital Management, Goldman Sachs, Lone Star Funds and Oaktree Capital. Oaktree was the most cited competitor in the final round of the auction.

The restructuring around CatalunyaCaixa will now proceed to an auction of the bank itself, which has been controlled by FROB, the state rescue fund that administers Spanish banks nationalised during the financial crisis. Bidders for the bank itself are expected to include other Spanish and European banks. Blackstone's purchase of the mortgage portfolio is part of the cleaning up of CatalunyaCaixa's balance sheet that will now allow the sale to go ahead. Blackstone had already picked up CatalunyaCaixa's mortgage servicing unit in April for the relatively tiny sum of 40 million euros, but it is not clear what influence, if any, that earlier related purchase had on Blackstone's final win in the larger auction of the mortgages themselves.

Earlier reports described Blackstone's new acquisition as a “risky” and “toxic” portfolio, but the degree of actual risk is not clear. FROB is remaining in the deal with Blackstone, contributing to a securitisation fund, which will now house the mortgages. FROB twice tried and failed to sell CatalunyaCaixa before, so a successful restructuring and sale process for the bank, in its hands since a 2011 bailout, is now a top priority. With the heavy discount on the sale price, Blackstone has a strong chance of being able to secure value from the portfolio, regardless of the condition of the loans themselves, and the injection of some state money into the securitisation fund sweetens the deal further. Plus, CatalunyaCaixa's mortgage servicing unit gives Blackstone the perfect instrument to administer the loan portfolio.

Private equity seems to have proven its case as a benefit to Europe in working out the remaining problems lingering in the aftermath of the financial crisis. If only the same degree of financial structuring savvy had been on display in Europe before the crisis broke.