Stress tests by the European Central Bank (ECB) in 2014 could lead to even greater deal flow in Europe, according to Lee Millstein, senior managing director of Cerberus Capital Management.
He noted that the ECB was on record as saying it would use stricter rules when stress testing banks’ balance sheets during its asset quality review in 2014, as it seeks to ensure banks have a capital ratio of 8 percent.
“I think the big potential catalyst coming forward is the asset quality review and stress tests being conducted by the ECB,” said Millstein, who heads European and Asian distressed and real estate investments on behalf of Cerberus. "Banks are trying to get ahead of these tests, looking to sell assets that are deemed problem assets.”
Cerberus has been among the busiest firms operating in the distressed real estate arena in Europe. It has been focused on five countries in Western Europe: the UK, Germany, Spain, Ireland and Italy, although it also has struck deals in Scandinavia, France and the Netherlands.
Millstein noted that his firm’s pipeline of investments in Europe is bigger now than at any time. Indeed, the New York-based firm has closed or is in the process of closing close to $4.5 billion of transactions since last December and has struck eight deals for almost $2.4 billion since September alone.
“Clearly, we think the biggest opportunity is the deleveraging and cleaning up of the European banks,” Milstein said. “It is not just the NPLs on bank balance sheets – €1.2 trillion and growing – but also huge amounts of real estate and companies that they have taken back through some kind of administration or foreclosure process. Combine that with the need for capital, and we see a huge flow of product coming out of bank balance sheets.”
Cerberus first began investing in this cycle in late 2010, when it agreed to a UK residential NPL deal, a sale-leaseback transaction of Spanish bank branches and a distressed CMBS deal involving German assets. “It has been a pretty steady flow since then,” said Millstein, “with probably close to 30 transactions, including four that we are in the process of closing. Looking at the first quarter of 2014 – like all the quarters recently – our pipeline seems to be bigger than any other time.”
Cerberus is transacting in Italy where it has two investments in the country firmly in its sights. Its debut deal this cycle was announced on December 24 when Italian bank UniCredit said it had reached agreement to sell a nonperforming unsecured consumer and personal loan portfolio to Cerberus with a book value of approximately €950 million.
The firm already has a large team in Europe, and its newest office opened in Madrid in early 2011. It is now contemplating opening another in Milan.