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Sunday, 22 October 2017

Doesn't look like WestLB is under pressure to offload assets

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

Is WestLB’s restructuring in good shape? I pose the question because even though the bank has opted to break up its businesses into bite-sized units to maximise sales potential, it doesn’t seem to be that keen to deal.

On the structured finance side, the German bank has been shopping its commodities, mining, pre-export finance, power, and infrastructure books separately and has attracted interest from a number of parties over time.

But news that Japanese lender SMBC’s bid to take over bits of the German bank’s corporate lending business, including its project finance assets, collapsed this week owing to valuation differences does make you wonder. No agreement on price was the same reason that talks between WestLB and US private equity firm Apollo over the sale of WestImmo’s Pfandbrief portfolio and other parts of the real estate unit broke down at the end of 2011.

It’s unclear whether SMBC was the only remaining bidder. HSBC Trinkaus & Burkhardt pulled out last year but IFR had understood that Siemens was also looking at some of the assets. It’s no secret that the German conglomerate is keen to build out its infrastructure team, but on the basis of the company’s ‘no comment’ comment to me today on whether it was looking at WestLB assets, it appears that is a secret. Beyond negotiations about assets for sale, it’s plausible that SMBC might try and hire WestLB’s mining and pre export financing teams, while Siemens could be looking at hiring some of the bank’s project finance people.

Good assets

The question on the negotiations is: did the Japanese bank low-ball or, on the flip side, was WestLB holding out for an unrealistic price? I’d err on the side of the former. WestLB has some good assets but clearly isn’t prepared to sell at a discount. In the case of the WestImmo talks, Apollo bid way below the unit’s break-up value: I’ve seen reports of as much as €300m of clear water between the two sides. The whole of WestImmo will now likely end up in WestLB’s bad bank and its Pfandbrief will be allowed to run off.

What’s interesting about the WestLB restructuring in a broader industry context is the speculation it kicked off about whether it would lead to further Landesbank consolidation

Beyond price, though, you’ve got to wonder how committed WestLB really is to offloading between now and the June 30 EU-imposed restructuring deadline. I imagine the very fact that any assets (including the corporate lending and structured finance portfolios, and the derivatives book) either unsold or not transferred to either the Verbundbank or to the legacy bank (SPM-Bank) will simply transfer to the bad bank reduces the urgency and imperative to force deals through now. Maybe those negotiating the sales reckon the bad bank (Erste Abwicklungsanstalt or EAA) will be able to get a better price in an (eventually) improving macro environment. That could be a big ask.

What’s interesting about the WestLB restructuring in a broader industry context is the speculation it kicked off about whether it would lead to further Landesbank consolidation. On that, I’m not so sure. In an extremely convoluted takeover structure, WestLB rival Helaba (Landesbank Hessen-Thuringen) is acquiring between €40bn and €45bn of WestLB assets as a pre-arranged component of the restructuring plan, along with around 400 staff. This so-called Verbundbank transfer takes effect on July 1. I think it’s clear that Helaba will probably also end up acquiring SPM-Bank from the State of North Rhine-Westphalia, with most of the 1,000 legacy employees.

That leaves a relatively neat group of just six Landesbank groups. Following a series of mergers in past years, the remaining LBs are Bayerische Landesbank (BayernLB, which owns 49.9% of Landesbank Saar); HSH Nordbank (created out of mergers with Hamburgische Landesbank and Landesbank Schleswig-Holstein); Landesbank  Baden-Wuerttemberg (LBBW, incorporating Baden-Wuerttembergische Bank, Sachsen Bank and Rheinland-Pfalz Bank); NordLB (which owns 92.5% of Bremer Landesbank); Landesbank Berlin; and Landesbank Hessen-Thuringen (Helaba, incorporating some/all of legacy WestLB). That’s a hell of a lot neater than in previous years. Now I’m no Landesbank specialist, but how much room in practice does that leave for more consolidation? I’m in the process of trying to find out. Watch this space.

● In an unrelated note, I see that WestLB’s leased London offices at Woolgate Exchange in the City, have been sold. The building was refinanced through a CMBS deal Cornerstone Titan 2006-1. Not sure what that means for the tenants. The London offices are due to be used by SPM-Bank.

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