Dan Fasulo on Last Week's Poll Question

WILL LEHMAN’S $40 BN PORTFOLIO FIND A BUYER?

Close on the heels of Merrill Lynch’s July sale of $31 billion in CDOs, Lehman Brothers has put a $40 billion real estate and mortgage portfolio on the market where, according to a majority of this week’s poll respondents, it can expect to remain for some time. A huge majority of 68% were of the opinion that the portfolio will languish on the market, while only 32% say it will quickly find a buyer. Dan Fasulo, managing director of Real Capital Analytics, thinks this deal could be attractive to certain buyers. Here are his thoughts:

“From the macro level, this is the type of deal that the large equity funds love to sink their teeth into. The trick in this case will be trying to figure out how to finance a deal this large in this type of environment. But some of these equity funds, like Blackstone and Carlyle, have raised tens of billions of dollars in capital, and they like to put that capital out all at once in just a few transactions as opposed to going deal by deal. It’s more efficient, because you spend the same amount of time analyzing a large deal as you would a small deal. In this type of situation, where there’s an element of distress, if this works out right, there’s a chance to make a significant amount of money.

“This might fall under the trend of banks looking to raise financing. Some of them are getting very creative. Besides these large corporate type deals, we’ve definitely seen an uptick in sale-leaseback transactions. Bank of America, Washington Mutual and Citigroup have been selling real estate assets all over the world and leasing them back, They’ve sold buildings in Tokyo, New York, London—major office towers to raise capital.

“I think many of these large financial institutions would love to get some of their real estate debt off their books, the problem is, there are not enough of these assets trading right now to create a market. Not everybody wants to sell their assets for 20 cents on the dollar like Merrill did. I know that a lot of these assets aren’t bad, and a lot of them are worth a lot more than 20 cents on the dollar, but it’s like if you own a used car. If nobody wants to buy it, what’s the value of the car? Zero. It’s a tough situation for everyone right now until the market gets jump started again.

“From what I understand, Lehman’s selling the part of their business that’s generated a good amount of revenue. It’s one of those groups within Lehman that’s very attractive to outside players like the major private equity firms. I heard that Lehman’s selling not only the assets, but also part of the operation, so there’s certainly more of a strategic opportunity here for one of those large private equity funds to not only buy the assets but to buy these operating units and all the talented employees there and roll them into their existing business. That’s a significant opportunity for one of those equity shops looking to increase their strategic capabilities.”