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Eurocastle Investment Ltd is undegoing a new investment strategy seeking to leverage experience of over two decades in the Southern European distressed debt market. With over €200 billion of non-performing exposures (“NPE”) having traded from banks in Italy, Spain and Greece over the past 3 years and now largely sitting in the hands of investors, the Manager has identified an opportunity to create a Southern European speciality finance and real estate platform with a geographic focus initially in Greece and Italy. Through the new investment strategy, Eurocastle is seeking to build a large granular portfolio of loans and real estate assets over time, targeting gross unlevered returns in the high single digits, increasing to the mid-teens after modest leverage.
The strategy has two key pillars which capitalise on the desire of NPE investors to accelerate collections:
(1) Speciality Finance
• The platform intends to source opportunities to provide capital to borrowers who are unable to raise financing from traditional banks.
• The platform intends to focus on borrowers which the Company believes are likely able to agree a discounted pay off (“DPO”) of their debt with NPE investors who are willing to accept DPOs to drive their own returns.
• Capital is expected to be provided to borrowers with strong collateral asset value to refinance or restructure their debt. The Company believes that borrowers in this position are generally willing to agree to attractive terms, in order to rehabilitate their credit and become re-performing.
• New capital would typically be secured against real estate and other hard assets and provided in situations where the borrower is free of other senior creditors. Sustainability criteria will be employed in structuring the Company’s investments.
(2) Opportunistic Real Estate
• The Company has identified an opportunity to build a granular portfolio of real estate coming from NPE portfolios.
• The strategy seeks to take advantage of an anticipated significant supply and demand imbalance (i) for real estate collateral being sold through uncompetitive auctions and (ii) from NPE investors seeking to dispose of individual real estate assets they have repossessed.
• The Company believes that high barriers to entry generally limit participation in judicial auctions, while it expects volumes to increase following a backlog from auctions postponed during the COVID-19 pandemic. The Company also expects a significant increase in auction volumes driven by the recent changes in legislation to streamline the auction processes and recent sizeable trades of portfolios to NPE investors actively seeking to realise collateral in order to enhance their returns.
• The Manager expects this significant demand and supply imbalance will likely result in real estate assets being sold at a material discount to their open market value. The Company intends to capitalize on the Manager’s experience and knowledge of the market and auction systems to identify assets being sold at a discount to market value which the platform will then acquire and sell through an open market process over time. The Company will also seek to improve the environmental performance of such assets. • In addition, complementing its specialty finance business, the platform may also provide capital to real estate companies who are unable to access traditional financing sources.
• In light of the anticipated granular nature of the opportunity, the strategy is targeting individual real estate acquisitions of below €10 million, subject to certain exceptions.
While specialty finance and real estate form the core of the Company’s new investment strategy, the Company may seek to make opportunistic investments arising from the significant capital to be provided by the European Union’s recently established recovery and resilience facility (“RRF”) of approximately €724 billion to support business in the wake of the COVID-19 pandemic. The Company will focus on opportunities aligned to its sustainable investing principles. The Board believes that these investments will provide the Company with stable running cash flows which, once the business is deemed sufficiently established, will provide the Company with the basis to pay a regular stable dividend with a targeted unlevered yield in the high single digits.
The Company is also intending to raise cash from new and existing institutional investors by way of a private placement of Ordinary Shares in order to support the new investment strategy in the course of 2022. The timing and quantum of the funds to be raised and the terms (including the price) at which the new shares could be issued will be determined by the Board at the relevant time.
