A company formed by real estate professionals who all once worked at Lone Star’s asset management group, Hudson Advisors, senses the time is coming for distressed debt transactions in Germany.
Arcida Advisors was formed to focus on non-performing loans (NPLs), sub-performing loans and other debt situations, but were almost laughed at two years ago by those asking where the distressed deals were coming from.
But with IFRS accounting changes, the war in Ukraine, and now inflation and rising interest rates squeezing parts of the market - particularly project developers - it is they who might have the last laugh.
In a recent interview with PropertyEU, three of the firm’s managing partners explained what they were seeing in Germany.
Oliver Platt, Michel Antler and Andre Barth are head of transactions, head of business development, and head of legal, ESG and compliance respectively.
Platt said: What we actually see in the market right now – and it is a real topic at the moment – is project development firms and midsize SMEs in Germany. Those that are not too big to fail – the smaller ones - need to get new financing. Those with projects of €20 mln to €50 mln are facing a situation in which they did formative deals, so they have to accept a certain purchase price, but it is not enough to complete the building. Now they are under water.’
This is where Arcida might come in with mezzanine loans, the acquisition of loans, distressed debt and solving corporate situations where real estate is involved.
Capital is becoming available for the strategy. Frankfurt-based Arcida is backed by Germany family office, Barton Group. Moreover, it is exclusive advisor to Nexum Capital which earlier this year launched Nexum Tor Fund I – a Luxembourg domiciled opportunistic SICAV looking to raise up to €300 mln of equity for the distressed debt market and special situations where stranded real estate with value add potential exists across the DACH region with the main target being Germany.
The fund will invest in NPLs, sub performing loans, real estate owned assets (REO) and value add opportunities, with a first close of €50 mln expected soon.
This fundraise comes as Germany endures a surge in bankruptcies. Failures were up 34% by 762 year-on-year in September, Leibniz Institute for Economic Research Halle (IWH) said last week.
‘The number of insolvencies will continue to rise noticeably in the coming months,’ said Steffen Müller, head of the IWH department for structural change and productivity. The severely deteriorating economic situation, sharply rising prices, energy costs, wages and interest on loans are rising. ‘After a long period of very low insolvency figures, they are expected to return to the pre-coronavirus level in November 2022,’ added Müller.
Perhaps an early sign of things to come in the real estate development sector was Berlin-based Terragon, which filed for insolvency several months ago. Among its property interests is a joint venture residential development project in Westfield Hamburg-Überseequartier together with Garbe and Unibail-Rodamco-Westfield.
Backing Arcida's strategy is the Barton family, which has taken a stake in the company to add to its other property investment strategies.
Dominik Barton, CEO of Barton Group, said: 'The property market is currently seeing a paradigm shift. Riding the cycle is yesterday’s strategy.'
'That is why demand for companies which can realise returns through working the underlying asset has soared. Market potential for real estate-secured debt is becoming increasingly higher as existing loans will be taken over, for example to secure successful completion of a project developments through specialist investment expertise. We will fill this void. We see attractive opportunities for potential investors in the segment.'
Arcida's Antler said: 'Inflation, interest rate reversal, war and late effects of the pandemic have moved us along into a new market cycle. Over the coming months, even solid property projects will come under pressure and capital needs will rise. Distressed debt situations will come to the fore.'
Arcida’s team comprises Platt, Antler, Barth, Renaud Linclau as head of portfolio management, and now Jorg Dornbusch, head of workout, who comes from Barton Group.
All five of the company’s partners once worked in Germany for Lone Star’s Hudson Advisors, which back in 2004 was buying €1 bn-plus NPL portfolios from the likes of Dresdner Bank.
The team has also worked for the likes of Cerberus in the case of Dornbusch, Oaktree Capital, Deutsche Bank, ING, and Arminius Funds. Yet Arcida is not looking to whale hunt in the kinds of waters that Cerberus, Lone Star and Oaktree swim in, but rather target smaller transactions.
Said Platt: ‘Now we see a lot of deals.’