RBS has not ruled out funding the Project Isobel deal itself
A LANDMARK deal to sell off £1.4 billion of Royal Bank of Scotland's high risk property debt is in trouble because the buyer can't secure funding on attractive terms.
Reuters reports the deal with private equity firm Blackstone which requires 60 per cent third-party funding is in danger of collapse because of the difficulties.
Blackstone is thought to have tried to arrange debt funding with Goldman Sachs, Citi and HSBC but failed to agree terms which would make the deal attractive.
RBS is said to be in talks to rescue the deal, and has not ruled out funding the deal itself, but has declined to comment.
Some of the loans RBS is selling off are believed to be currently held within the UK Government's Asset Protection Scheme.
However a senior Scottish accountant, who asked not to be named, said the fact Blackstone had been unable to secure funding for the loans is because the assets are valued too high.
He said: "If RBS end up lending to the purchaser, it may be able to take to loans off its balance sheet with a new loan to Blackstone, so long as the deal is deemed to be arms length.
"But the terms of the original loans to the individual borrowers don't change, they merely transfer over to the new vehicle, as does the risk if those loans go sour.
"It looks like these loans have been bundled and a price established between Blackstone and RBS, but the fact Blackstone has been unable to secure funding for the deal suggests the assets are valued too high.
"So if RBS agrees to fund the deal on the original terms agreed with Blackstone, that would mean the UK taxpayer is in fact backing the deal.
"But if the market has no appetite for the debt, then RBS may have to look again at the value of the assets its looking to sell and revalue those assets accordingly."
Private equity firm Blackstone came to an agreement with RBS in July to take a 25 per cent stake in a £1.4 billion special investment vehicle set up to manage some of the banks most risky loans.
Although the terms of the deal including the price paid by Blackstone have not been disclosed the discount on the face value of the loans is believed to be "substantial" and in the region of 30 per cent.
RBS has set up Project Isobel last year as the first of what was to be a series of investment vehicles to offload around £80 billion of non-core property assets.
The bank came up with the model to avoid taking a massive hit on its most troublesome loans and assets were they were sold in the open market.
Property experts have been awaiting the outcome of the Project Isobel deal for almost a year, believing the structure may form the template for other banks looking to dispose of unwanted property loans.
The Isobel deal would leave RBS with a 75 per cent equity stake in the venture with the assets being sold off over time.
If the deal collapses, it would be seen as a major blow to other property lenders looking to offload riskier loans, most notably Lloyds Banking Group which inherited billions in commercial property loans from its takeover of Bank of Scotland.
Blackstone won the Project Isobel deal in a competitive tendering process which included bids from Starwood Capital, Lone Star and KKR in collaboration with Westbrook Partners.
The agreed deal was structured so RBS would take a share of any future profits for asset value gains as well as allowing RBS to avoid selling those assets at a distressed price.
The Isobel portfolio includes high loan-to-value debt - averaging 90 per cent loan to value - which is still performing as well as a number of Operating Company/Property Company deals, known as 'opco-propco' splits, where a business sells its properties and leases them back.
A large portion of these opco-propco deals are tied to the Southern Cross care home chain, which funded growth by taking short-term bank loans to fund acquisitions and then spit off the property assets into a separate company - the propco.
The propco sells the properties to a property investor, with the value determined by how much rent the carehome operator pays.
Property investors determine the value of the assets from the rent yield on the investment as well as the rising value of the property.
The original investor takes the money from the sale of the property and pays back the bank, essentially acquiring a new operating company for no outlay.
However, opco-propco only works if the homes are near full and fees charged rise with inflation.
But when councils cut the fee they are willing to pay, revenues coming in are not enough to cover the high rents and cover staff and running costs.
Shares in RBS fell nearly four per cent in early trading today.