LONDON, Feb 6 (IFR) - Funds are chasing bargains in UK mortgages from legacy
holders, nearly six years after the collapse of Northern Rock, and relying on
specialist debt collectors to extract value from them.
Australian specialist servicer and lender Pepper (trading as Engage), was
mandated to service a GBP1.5bn pool of UK mortgages from Citigroup, which
shuttered its UK origination effort via the "Future Mortgages" brand back in
Pepper, which rebranded its operations following its purchase of Oakwood
Global last September, aims to offer a servicing style that focuses on improving
"We try to help investors turn these books around," said Richard Klemmer,
chief operating officer of Pepper UK.
"Someone might go and buy a book of non-performing loans with the aim of
making them performing again and selling them or raising better financing. We
would align our strategy, and our fees, to this turnaround plan."
As an example, Fortress sponsored a securitisation called Virgil Mortgages
No. 1 in 2013, which raised finance against a book of re-performing loans -
mortgages that were once delinquent but had become current again.
Klemmer explained: "The UK is a very well-developed mortgage trading market
with good price discovery. The sellers are typically large banks or investment
banks who no longer see these lines as core business, while the buyers are a
very broad range, including IB principal desks, private equity and hedge funds."
Some of the early entrants to the whole loan market, however, are taking
profits. Apollo sponsored the first non-conforming RMBS after the crisis,
funding a portfolio via A.L.B.A 2011-1, but has sold its equity stake in that
For others, though, the turnaround trade has some distance to run.
Deutsche Bank, Goldman Sachs and Macquarie are among the banks still doing
principal trades. The fund landscape is more diverse, but includes a huge swathe
of private equity and hedge funds. Most of these need to get outside support to
service loan portfolios - only Fortress (which bought Paratus AMC from GMAC) and
Apollo (with Lapithus) have in-house units.
This is a huge contrast to other hunting grounds for the big private equity
players. For example, in Spain last year, TPG bought La Caixa's servicing arm,
Cerberus bought Bankia's, Kennedy Wilson and Varde bought Catalunya Bank's,
while Apollo was ahead of the game, buying Spanish servicer Avant (as well as
Spanish books from BofA Merrill Lynch and Citigroup) back in 2011 and adding EVO
Banco and FinanMadrid in 2013.
And having control of a loan servicer makes a huge difference for those
institutions taking on more distressed assets.
The Irish Independent reports Pepper's Irish unit and Kennedy Wilson both
offering borrowers discounts of up to 50% on their mortgages, which, given that
some of the mortgages have been acquired for 20 cents, still means a large
potential profit, particularly if the mortgages can be upgraded from
"non-performing" to "performing".
Klemmer said: "Right now, our Irish operation is seeing amazing growth. A
huge number of portfolios in Ireland are in the market right now and there are
few established servicers in Ireland."
Pepper has been mandated to service a portfolio for Nama, should an auction
of 28,000 former Anglo-Irish (IBRC) mortgages fail to meet the reserve price
this Friday. In this case, the book will be transferred to NAMA to be serviced
(Reporting By Owen Sanderson, editing Anil Mayre)