Nepi debt bid ‘routine in Europe’

New Europe Property Investments (Nepi) CEO Martin Slabbert said the legal action from Argo was likely “meant to discourage us and the banks from proceeding with the transaction”.

Deal such as New Europe Property Investments’ (Nepi’s) proposed acquisition of a Romanian retail park’s debt are more common in Europe than SA, reflecting the relatively healthy state of SA’s listed property and banking sectors, analysts say.

JSE-listed Nepi is facing legal action from regional competitor Argo Real Estate Opportunities Fund relating to Nepi’s plans to acquire part of the debt of Argo’s Sibiu Shopping City from a bank. Should Nepi successfully acquire the retail park’s debt, which Argo has had difficulty in repaying, it would pave the way for Nepi to either make a profit on the debt if it is repaid by Argo or to have a claim to the asset itself.

Nepi CEO Martin Slabbert said the legal action from Argo was likely “meant to discourage us and the banks from proceeding with the transaction”.

“There is certainly nothing illegal, unethical or unusual about this — debt is being disposed of by European banks in the current climate all the time,” he said.

The head of corporate ratings for Africa at Global Credit Ratings, Eyal Shevel, said last week that similar deals in the South African market were less common. “I think this is more a factor of the strong state of the local property and banking sectors compared to Europe, rather than any legal reasons why a similar deal could not happen,” he said.

The deal had become available both because the retail park had run into financial trouble and because the credit rating of its lender, Volksbank, had been downgraded in recent years.

This suggested that “there may be some liquidity issues” at the bank and, therefore, it was likely that Volksbank “was much happier to receive upfront cash for its debt rights, rather than having to carry a distressed loan on its balance sheet”.

Mr Shevel said that South African banks had been shielded from many of the issues plaguing European banks.

With subprime problems, sovereign debt risks and weak economies, many European banks had been carrying large amounts of bad debt.

Meanwhile, Mr Shevel said that the South African listed property sector had performed well in a more stable economic environment and buoyed by a strong retail sector. As a large amount of equity had been raised in the local listed property space, transactions had been largely equity funded and at lower gearing levels than in Europe.

However, Mr Shevel said the local residential property sector had encountered problems and banks had taken over large property portfolios because their debts could no longer be serviced.

As a result, local banks had cut back on property lending as they had seen rising levels of bad debt on their mortgage books.

But local banks were “solvent and strong” in comparison to Europe, and therefore did not need to offload distressed debt at a lower price, as Volksbank was looking to do with Nepi.

Nonbank lender Paragon Lending Solutions CEO Gary Palmer said last week that while the South African commercial property industry had seen “some distress”, mostly among properties with lower quality tenants, the residential sector had taken the biggest strain following the implementation of the National Credit Act and the global economic recession.

Mr Palmer said the buying of distressed debt was more common in Europe than in SA.

“On the listed property side and the general commercial property side, the fundamentals are still good and our banks are very well regulated.

“That’s why we haven’t seen as much distress here in SA as in Europe and America, which was a bloodbath,” he said.

Mr Palmer said that while bad debt transfers did occur in SA, this did not happen as frequently as other markets.

“The banks’ attitude here is to assist the clients a lot more than overseas,” he said.

European banks had needed to write off bad debt immediately “and get it off their books”.

Mr Palmer said that in the more sophisticated European and American markets, many funds had been created “to go in and take over the banks’ debt”.

The nonbank lender industry, which could supply loans far quicker than banks due to the levels of regulation in the banking industry, was playing a larger role in the local commercial property industry, he said.

Turnaround times of banks in packaging loans had slowed considerably with the introduction of new regulations including the National Credit Act and Basel 3 capital requirements.