Lone Star, Hypo Ink World's Largest Dubious Debt Deal

MUNICH-The locally based real estate financier Hypo Real Estate Bank AG has agreed to sell a $4.4-billion (Euro 3.6-billion) portfolio of poorly performing German real estate loans to Lone Star Funds, a Dallas-based buyer of troubled loans. The two companies have agreed not to reveal the purchase price.The portfolio consists of commercial loans (56%) and residential real estate loans (44%). The biggest chunk of the portfolio ($3 billion) is comprised of non-performing loans. Another $460 million are sub-performing loans and the remaining $660 million are performing loans that have been placed on a watch list. Cumulative arrears (interest, costs, redemption payments) of about $365 million (Euro 300 million) are included in the overall volume. All told, the portfolio includes about 4,200 loans extended to 1,700 customers.As mandated by Germany’s Transformation Act–which is expected to be completed by the end of 2004–Hypo will spin off the loan portfolio as a new company, after which Lone Star will buy all of the new entity’s shares. Hypo’s managing board says it believes the deal to be the largest transaction of its type carried out anywhere in the world. HVB Real Estate Structured Products/M&A arranged the transaction.As a result of the sale, Hypo RealEstate Deutschland’s the non-performing loans will be reduced by 75% from about $4.02 billion (Euro 3.32 billion, including costs and interest) to a remainder of about $1.02 billion (Euro 0.84 billion). The reduction will reportedly allow parent company Hypo Real Estate Bank AG to complete its restructuring much earlier than originally planned.Lone Star buys non-performing loans at a discount and tries to capitalize by convincing debtors to repay at least part of the debt, or by repackaging them as securities or selling off the assets backing the loans. Lone Star’s previous troubled loan purchases in Germany include a Euro 200 million portfolio from Gontard & Metallbank AG and a Euro 490 million portfolio from Hypo Real Estate last year. In other Lone Star news, the company has reportedly agreed to buy three Tokyo buildings for $1.6 billion (117 billion yen) from Kokusai Motorcars Co., a Japanese taxi operator. The office towers are located in the city’s Akasaka financial district. The deal is being touted as the largest property purchase in Japan by a foreign investor in six years. Lone Star reportedly beat out American International Group Inc, Morgan Stanley and other bidders. Published reports say Lone Star has raised $4 billion from investors to buy real estate in Japan and South Korea, in part because Tokyo property prices have bottomed out after a decade-long slide that reduced values by as much as 80%.