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BAI Insight 32 with Allen & Overy, Acathia Capital and FERI Topic: Profit opportunities with commercial mortgages in the secondary market. Frankfurt, 28.

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1 BAI Insight 32 with Allen & Overy, Acathia Capital and FERI Topic: Return opportunities with commercial mortgages in the secondary market Frankfurt, April 28, 2016

2 Presentation of the BAI founded in 1997 Representation of interests across product and asset classes in Germany and Europe Strategies and investment concepts from the segments of infrastructure, liquid alternatives (including hedge funds, loan / debt strategies), private equity, commodities, etc. Association members are recruited from all areas of the professional alternative investments business (currently 159 renowned, nationally and internationally active companies) Catalyst between professional German investors and the leading providers of alternative investment products worldwide Since 2012 honorary investor advisory board 2

3 Added value for members and investors Briefings on current legislative and regulatory projects at national and international level Participation in the BAI technical committees BAI homepage with comprehensive information on our activities as well as a closed member and investor area with BAI statements on legislative projects, briefings, specialist articles, etc. Publication possibilities in the BAI newsletter and on the BAI homepage Participation in BAI events and conferences as well as events of our cooperation partners Due diligence questionnaires for infrastructure, hedge fund and private equity investments 3

4 Contact RA Frank Dornseifer Managing Director Bundesverband Alternative Investments e.v. (BAI) +49 (0)

5 Confidential Acquisition of commercial mortgages on the secondary market What are the opportunities for institutional investors in the current low interest rate environment? BAI Insight 32 Frankfurt am Main, April 28, 2016

6 Why are there opportunities in the secondary market? Page 2

7 Strong regulation makes the sale of forborne exposures attractive Performing Exposures Non Performing Exposures Per EBA ITS (via Art. 99 (4) CRR) Fully performing Revised terms not qualifying as forborne Forborne Exposures Per EBA ITS (via Art. 99 (4) CRR ) Over 90 days past due, and / or unlikely to pay without recourse to collateral Defaulted Per Art. 178 CRR Impaired Per local GAAP / IFRS Revised terms Refinanced / other Minimum two year stay (or written off / repaid in full) days past due Sources: Fitch, adopted from EBA page 3

8 Growing capital requirements encourage the reduction of problematic exposures 15.0% 15.0% 14.0% 14.0% 13.0% 12.0% 11.0% Countercyclical Buffer 13.0% 12.0% 11.0% 10 .0% 9.0% 8.0% Pillar II Conservation Buffer 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Tier 2 Capital Other Tier 1 Capital 7.0% 6.0% 5.0% 4.0% 4.0% 3.0% 2.0% CET 1 Capital 3.0% 2.0% 1.0% 1.0% 0.0% -1, 0% Basel II Basel III 0.0% -1.0% Page 4 Source: Basel III: A global regulatory framework for more resilient banks and banking systems

9 And numerous wind-down banks or wind-down portfolios On the balance sheet Guarantees with an impact on the balance sheet No deconsolidation High degree of structural complexity External guarantees Specific regulations / legal framework Internal restructuring unit No deconsolidation Transfer of assets to a separate business area Separate organization and business operations Internal separation of risk / return between the business areas and the bathroom Bank off-balance sheet-independent SPV Specialization of asset classes Complexity in the existing market External rating / financing Transfer of assets, effects on income statement Required capital Bad bank or spin-off Structural complexity Legal, tax, regulatory, transfer of assets vs. carve-out capital and financing requirements Operational complexity and construction (existing shell vs. new bank) Structured solution Bank-controlled unit Page 5

10 But few distressed debt transactions in Germany! page 6

11 Declines in trading of bad credit portfolios in Europe and Germany Cumulative credit portfolio sales Credit portfolio sales (Q 1, 2016) by region Volume consistently high over years by C&W But currently nothing in D Volume in previous years Page 7

12 What are the current opportunities on the secondary market? page 8

13 Current environment calls for a differentiated approach Challenges Significantly more opportunistic equity capital than investment opportunities: - Unrealistically high return requirements of opportunistic investors - German banks' limited willingness to realize losses Boom on real estate market improves loan quality Banks need interest-bearing portfolios to cover costs Portfolio transactions involve reputational risk for banks and require a lot of effort Solution approaches Reduced return requirements allow the acquisition of real estate loans at par Buy non-strategic or difficult portfolios Realization of the return through the debtor and not through a purchase price discount Hand-picked, sometimes smaller, individual transactions instead of portfolio transactions Focus on negotiated transactions instead of competitive processes Page 9

14 Low competition enables excess return Typical bank wind-down portfolio Standard business Long remaining terms Low return portfolios are primarily taken over by other banks LTV tends to be less than 75% Attractive segment Loans that are serviced and are not repaid when they fall due Marketable collateral with stable cash flow Investment grade quality Skimming off interest on arrears Loans defaulted, canceled Opportunistic funds as buyers Trending in value adjustments Page 10

15 These loans are in the sweet spot willingness to sell. Banks sell mortgage loans from certain customers Loans that are not repaid on time (expiring, after expiry or in standstill) Financing from the last real estate boom with a tendency to have a high loan-to-value ratio Unwanted borrowers: no target customer without access to additional equity to enable refinancing or passive debtor with unrealistic expectations Investment grade quality Selection of fully secured loans First-rate secured with marketable commercial real estate in Germany: target volume EUR million per loan or loan portfolio Good occupancy rate with stable cash flow loan-to-value ratio (LTV) averaging below 85 % of the market value Investment grade rating Yield kicker Agreement on increased interest in a standstill agreement With a standstill agreement, the debtor receives one to three years for orderly repayment and the investor receives t in return an increased interest rate Page 11

16 Attractive return / risk profile of the loans acquired Expiring real estate loans Advantages of the Albulus investment strategy: Expected return on real estate financing real estate (fund) Lower risk profile due to value buffers based on the market value of the real estate (LTV below 85%) Higher return potential Government bonds Expected risk (LTV) Limited market risk due to the one to three year term of the standstill agreements Page 12 NOTE: Please note that this diagram shows the expected return / risk profile purely conceptually, but is not intended to depict the actual expected returns or risks.

17 Added value through selective acquisition and rapid reorganization Acquisition of the loan Comprehensive real estate examination prior to acquisition Validation of the internal real estate valuation through external market value appraisal and creation of an internal rating Proven purchase documentation with guarantee package from the loan seller Restructuring with standstill agreement aimed for Duration of standstill agreement depending on the situation and business plan of the debtor Increased interest rate Optimization of the security situation and control of the cash flow Active management of property security and debtors Agreement of business plan with schedule for follow-up financing or property sales Controlling and monitoring of property asset management to maintain the value of security Albulus offers expertise and credibility in the exploitation of property security Page 13

18 Why do the debtors cooperate?

19 Track record on the secondary market for over 10 years Focused investor in real estate loans Albulus has invested more than EUR 175 million in equity in 6 individual transactions. The investment focus is on individual loans that are primarily secured on attractive commercial properties in Germany. Two investment strategies pursued in parallel: Expiring loans Non-performing real estate loans Average return of over 30% on NPL transactions that have already been processed Established business relationships with banks and a comprehensive database of potentially attractive loans Exclusive investment platform Lohnbach platform from Soros Real Estate Partners / Grove Acquisition of 5 NPL portfolios with Over EUR 500 million in receivables volume as well as co-investment on EUR 1.5 billion in NPL portfolio with strategic partner Shinsei Bank. Takeover of both loan management and real estate asset management for EUR 1.3 billion in receivables volume. As a special servicer, the team received the best initial rating awarded by Fitch (CSS3 +), which was raised to CSS2- in the following year. Average return 9% (before debt) achieved. Real estate collateral realized in over 100 individual transactions and 35 refinancing transactions implemented Page 15

20 Disclaimer This presentation and the information contained herein (the presentation) are confidential and should be regarded as a summary. The presentation is made available to the recipient by Albulus Advisors Germany GmbH and is used to support experienced and professional investors. This presentation is intended as a description for the experienced professional investor. The contents of this presentation are not to be understood as investment, legal or tax advice and in no way take into account the special circumstances of each individual recipient to whom this presentation was given. Furthermore, Albulus Advisors Germany GmbH (the advisor) is not acting in the capacity of trustee for the recipient of this presentation. The presentation constitutes neither an offer to sell nor an invitation to submit an offer to buy shares or an offer to advise the manager. Furthermore, the right to make additions and changes to any type of presentation is reserved. The presentation is provided for professional investors only on a strictly confidential basis. By accepting the presentation, the recipient confirms the confidentiality of the contents of the presentation and agrees not to reproduce the presentation or copies thereof, nor to pass them on to third parties in any form or to make them available to third parties. He further confirms that the presentation will only be used for the purpose of deciding on a possible own system. All opinions, forecasts, predictions or other statements, other than those about historical facts, made in this presentation are forward-looking statements. While managers believe that the expectations reflected in such forward-looking statements are reasonable, they are subject to a number of assumptions, risks and uncertainties. Therefore, neither the consultants nor any of their subsidiaries or affiliates make any representations or warranties, express or implied, and accept no liability with respect to the correctness, accuracy, completeness or adequacy of the facts, opinions, estimates, projections or other information contained herein Presentation or further information, written or oral communication or any other document at any time in connection with this presentation is and has been presented. Furthermore, none of the content from this presentation or from other information provided or received in any other form is to be regarded as a promise or assurance with regard to future events or services. Past income from investments in real estate-secured loan receivables (or real estate-related investments) is no guarantee that the same (or higher) income from investments in real-estate-secured loan receivables (or real estate-related investments) will also be achieved in the future. We consider all information from third-party sources to be reliable and up-to-date, but no guarantee can be given with regard to the statements made by these sources. Furthermore, we do not assume any obligation to update information in the presentation. All assumptions, figures and calculations contained in the presentation should be examined independently of every professional investor as recipient or his adviser as well as the specific investment opportunity and the strategies presented. By accepting this presentation, the recipient accepts the provisions of this declaration and undertakes, if requested, to return all materials received by the recipient from the managers, including this presentation, without keeping any copies thereof. Page 16

21 Contact Albulus Advisors Germany GmbH Goetheplatz Frankfurt am Main Tel. +49 (0) page 17

22 Can alternative investments replace or supplement fixed income? Beyond Private Equity, Hedge Funds, Infrastructure and LBO Debt Funds April 28, 2016

23 Specialist for investments in European financial service providers Investment manager for international, institutional investors Unique combination of over 12 years of investment experience of operational top management activities in the financial services sector 12 Investments in BaFin or comparable regulated institutions *

24 Bond yields are no longer enough *

25 Guaranteed interest rate has to be "worked hard" in the future Formerly New normal *

26 Where do you find the extra return with a manageable risk? Private Equity Equities Expected Return Private Debt Funds Real Estate Hedge Funds Infrastructure Debt Construction Financing Pfandbrief Bunds Expected Risk *

27 Alternative investments as a traditional Anglo-Saxon domain are not tailored to the requirements of German investors Requirements of German investors Investments in euros if possible, Germany if possible Must be investable under AnlV - as equity-efficient as possible under Solvelcy II Best possible risk-return profile: no maximum return or minimum risk, rather good ratio Short-term liquidity is not decisive: illiquidity / complexity premium rather than risk premium Understandable investment strategy; as little black box character as possible *

28 Goal: Realization of the illiquidity and complexity premium Expected return Equities Private Debt Funds Albulus CREDIT Real Estate Hedge Funds Infrastructure Debt Construction Financing Pfandbrief Bunds Expected Risk Private Equity Success factors Supply and demand determine the price: in purchasing, profit is therefore outside the standard drawers ; Niche strategies with convincing concepts Criteria for success: Proximity to the market Quick recognition and reaction to opportunities Out-of-the-box strategies Hurdle: often no suitable drawer *

29 Legal Notices Although the information contained in this presentation comes from carefully selected sources that we believe to be reliable and trustworthy, we do not guarantee the accuracy, correctness and completeness of the information contained in this presentation. To the extent permitted by law, Acathia Capital GmbH excludes any liability for the use of this document or its content. This document is for informational purposes only and does not constitute an offer, solicitation or recommendation to purchase Acathia products. In particular, it does not contain any legal or tax advice. Please note that this presentation is only a general, non-individualized presentation of products. Investment advice is not associated with this and does not take place. The entire content of this presentation is to be treated confidentially. Dissemination and publication of this presentation and its content in whole or in part is only permitted with the prior written consent of Acathia Capital GmbH. By accepting this document, you declare that you agree to the validity of the above provisions. Contact details Dr. Thomas Schmitt Managing Partner Phone: Acathia Capital GmbH Bockenheimer Landstr Frankfurt Germany *

30 Regulatory design options for investing in the commercial mortgage asset class AnlV, Solvency II efficient design options Frank Herring April 28, 2016 Allen & Overy 2016

31 Flight into alternative capital investments Allianz volume in billion euros, change in percent in 2015 Mortgage loan real estate 29.3 (+ 19%) 36.1 (+ 17%) Private placements Private equity infrastructure loans 4.7 (+ 9%) 4, 5 (+ 154%) 10.7 (+ 21%) Infrastructure (equity) 3.1 (+ 60%) Renewable energies 2.4 (+ 30%) currently medium-term target Total 92.1 (+ 24%) 110 Source : Börsenzeitung, Allianz Allen & Overy

32 Preliminary structuring questions for collective debt investments Who should be an investor? Regulatory requirements, sales restrictions Should loans be granted or only purchased? Is the purchase made by way of a true sale or synthetic / sub-participation? Are German borrowers also affected? KWG permit Is there withholding tax on loan interest in the borrower's country? Allen & Overy

33 Structural comparison of collective debt investments Case study Dt.InvKG Lux SCS Lux Securitization Vehicle as a lender in Germany VAG conformity Solvency II optimization Time to market Multi-purpose investment vehicle Formation costs Ongoing costs Taxation of the investment vehicle and the investors Transparent Transparent Interest taxation Allen & Overy

34 Legal basis Security Profitability Liquidity 125, 215 VAG Investment Ordinance (New:) RS 4/2011 (VA) Hedge Funds RS 7/2004 HF risks ABS / CLN RS 1/2002 Credit risks Derivatives RS 3/2000 Structured products 3/99 Market - Risks, depth of detail Allen & Overy

35 To whom does the Investment Ordinance (still) apply? For 1. pension funds within the meaning of 232 of the Insurance Supervision Act, 2. death funds within the meaning of 218 of the Insurance Supervision Act and 3. small insurance companies within the meaning of 211 of the Insurance Supervision Act. Annually written gross premium income <5 million or gross technical provisions <25 million For pension funds For other institutional investors who have voluntarily or by virtue of the articles of association submitted to the AnlV Loans secured by mortgages remain available for the real estate quota (25%) Allen & Overy

36 Real estate debt only for the real estate quota? Thesis (Scope, 2015): Investment Ordinance: Transparent debt funds with look-through reporting on underlying assets qualify for quotas of up to 50% depending on LTV and ranking of the assets; untransparent debt funds qualify for the 7.5% AIF bucket or the 7.5% ABS bucket (if the investment format is structured / note participation). Our opinion: Although the real estate quota includes every indirect investment in real estate debt, this does not change the fact that it must also be offset against the alternatives quota if the fund falls under 2 (1) no. 17 AnlV So also PWC: A look-through of the assets held by the AIF / vehicle and their allocation to the various asset classes and mixed ratios of the Investment Ordinance is required for AIF investments in accordance with 2 Para. 1 No. 17 AnlV ue not provided. Solution: Simultaneous issuance of profit participation rights (no problem with Lux Fonds) Allen & Overy

37 Treatment of real estate debt under Solvency II In the case of direct investments, real estate debt is treated like a bond, i.e. application of the modules spread risk, interest rate risk and currency risk It depends on the rating, duration and currency The (internal) rating depends largely on the loan Value and mortgage collateralization from With relatively low leverage, investment grade ratings are justifiable, and with correspondingly short maturities SCRs of 3-4.5% Other view: Default risk module Does this also apply to funds and SPVs? Look-through according to Art. 84 I or II Level 2 VO Note structure, which can be useful for other loan asset classes, is not required for real estate debt. Allen & Overy

38 Conclusion In our opinion, the closed Luxembourg special fund will prevail for real estate debt vehicles. Attention: The new RAIF structure is not recognized as a special fund for tax purposes! Under Solvency II aspects, the vehicle is ideal, because of the look-through. Under VAG aspects, the vehicle can be acquired, taking into account the alternatives quota.If there is no more space below this, you could think about profit participation rights.Alternatively: German open fund according to 284 KAGB (none 50% limit more) Allen & Overy

39 questions? This document is for general information only and does not replace legal advice. In this document, "Allen & Overy" refers to "Allen & Overy LLP or its affiliates". Any reference to partners refers to the shareholders of Allen & Overy LLP or employees or advisers of Allen & Overy LLP whose status and qualifications correspond to those of a partner or a person of equivalent status in an affiliate of Allen & Overy LLP. Allen & Overy LLP is a limited liability partnership registered in England and Wales under the number OC under English law and is subject to the provisions of the Law Society of England and Wales. A list of Allen & Overy LLP's shareholders and their professional qualifications can be viewed at the company's registered office, One Bishops Square, London, E1 6AD, or in any German office. Allen & Overy