Morgan Stanley Forms JV to Buy Loans

The private equity property funds that are managed by Morgan Stanley (MS - Analyst Report) and The Blackstone Group LP (BX - Analyst Report) have formed a joint venture (JV) – AET SPV Management Pty Limited – to acquire a portfolio of troubled property loans in Australia from a unit of UK-based Lloyds Banking Group plc (LYG - Snapshot Report).

The distressed property loans would be bought by the JV for £388 million ($252.4 million), though the actual value is pegged at £809 million ($526.3 million).

The portfolio being sold to Morgan Stanley and Blackstone comprise nearly 60-70 commercial property loans in Queensland, Melbourne and Canberra. The deal is expected to close by the end of the third quarter and is still subject to the consent of the underlying borrowers.

With the sale of this loan portfolio, majority of Lloyds’ nonperforming loans in Australia would be disposed of. These portfolios 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 in this deal were The Macquarie Group, an investor consortium that included The Goldman Sachs Group Inc. (GS - Analyst Report), Brookfield Asset Management and Singapore sovereign wealth fund - GIC Real Estate, and the hedge funds Pacific Alliance and Elliot Associates.

Llyods will utilize the cash received from the divestiture to pay off its debt. Similar to all the major banks across the globe, the sale is a part of the company’s strategy to remove non-core operations and strengthen the balance sheet. The loan portfolio had reported a loss of £183 million in 2011.

This is not the first distressed loan portfolio sale by Lloyds. In 2011, it had sold Australian and New Zealand property loan portfolio worth £1.08 billion in two separate deals to Goldman Sachs and Morgan Stanley.

Many banks sell their distressed and troubled real estate mortgages in order to get rid of these loss-making investments and concentrate more on their core businesses. Investors, who purchase these loans at a discount, often foreclose these principal properties for sale or redevelopment.

With the European economy reeling under debt crisis and recessionary pressures, many European companies have been disposing off their non-core operations to stabilize their balance sheet and meet stringent capital regulations. At the same time, the companies buying these loan portfolios see this as an opportunity to enter the real estate market, which is bound to grow once the economy recovers.

Currently, both Blackstone and Morgan Stanley retain a Zacks #3 Rank, which translates into a short-term Hold rating.