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On Friday, Reuters reported that a unit of UK-based Lloyds Banking Group plc (LYG - Snapshot Report) plans to sell a portfolio of troubled property loans in Australia to the private equity property funds managed by The Blackstone Group LP (BX - Analyst Report) and Morgan Stanley (MS - Analyst Report). The firms would be paying A$640 million ($621 million) to acquire the distressed loan portfolio worth A$1.9 billion ($1.8 billion).

Many banks sell their distressed and troubled real estate mortgages in order to get rid of these loss-making investments. Investors try to purchase these loans at a discount and often foreclose these principal properties for sale or redevelopment. Morgan Stanley and Blackstone seem to have acquired this problem loan portfolio with similar intentions.

Deutsche Bank AG (DB - Analyst Report) is acting as the financier to The Blackstone Real Estate Property Fund VII and the Morgan Stanley Real Estate Fund VII, the private equity property funds involved in this transaction. These funds are purchasing the loan portfolio at a discount of 66%.

According to the source, the loan portfolio comprised mainly of nonperforming loans. The underlying assets consist of apartments, residential condominiums, offices, retails and hotels. These properties are mainly located in New South Wales, Victoria and Queensland.

In March 2012, Lloyds auctioned distressed portfolio with an aim to offload its non-core assets. These assets were acquired by Lloyds when it purchased HBOS in 2008, including the Bank of Scotland and its international unit, BOS International.

Apart from Morgan Stanley and Blackstone, other bidders included Australian investment bank - the Macquarie Group, investor team comprised of Goldman, Brookfield and Singapore sovereign wealth fund GIC, and the hedge funds Pacific Alliance and Elliot Associates.

Previously, in November 2011, Lloyds had sold A$1.7 billion worth of distressed property loans to Morgan Stanley and The Goldman Sachs Group Inc. (GS - Analyst Report).

We believe that the restructuring initiatives taken by Lloyds to reduce balance sheet risk will improve its valuation over time. Moreover, its inorganic growth initiatives continue to be the significant growth drivers. Nevertheless, the company is facing major headwinds to stay competitive and regain its industry-leading position.

Currently, Lloyds retains a Zacks #4 Rank, which translates into a short-term Sell rating.

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