The Wall Street Journal | December 24, 2010
By Anton Troianovski And Eliot Brown

Credit Suisse Group is selling a $2.8 billion portfolio of soured commercial-property loans to Apollo Management LP for $1.2 billion, marking one of the largest bank sales of distressed real-estate loans since the downturn, according to people familiar with the matter.

The properties backed by the loans include apartment buildings in Germany and hotels in Denmark, Sweden and France, many of them of lower quality and in hard-hit locales, the people say.

Real-estate investors are watching loan sales closely.

Ever since the 2008 financial crisis, expectations of a world-wide wave of defaults by landlords and fire sales by banks have tantalized private-equity firms. In the early 1990s, some of these same firms generated handsome profits after buying big loan portfolios from the government as it took over failing U.S. savings-and-loans.

This time around, fire sales by banks have been few and far between. Banks have been wary of taking big losses on their boom-time loans while regulators have encouraged banks to restructure many of their commercial mortgages rather than simply foreclose.

Now some buyers say the spigot is starting to open.

Renewed banking profits have made losses on bad loans easier to swallow. Signs of a stabilizing real-estate market and demand for distressed assets from private-equity funds have pushed up prices that buyers are willing to pay. The loan sales could help healthier banks clean up their balance sheets as they look to expand with the economic recovery.

"We're starting to see loans in the marketplace at more realistic prices," said Paul Fuhrman, an executive at private-equity firm Colony Capital LLC, which has been buying distressed-loan portfolios. "We are definitely seeing the banks loosen up."

Major loan-sale advisers say they also have seen a large uptick in business. A CB Richard Ellis Group Inc. executive, Brian Stoffers, said at a November conference that the real-estate brokerage's loan-sale activity was up nearly 90% through the third quarter compared with the same period last year.

Loan-sale-advisory firm Debt Exchange Inc. has sold commercial real-estate loans on behalf of 38 different financial institutions since early October, compared with 19 in the last three months of 2009, according to Chief Executive Kingsley Greenland.

"Many banks are getting more aggressive," Mr. Greenland said. "Not only are they marking the assets appropriately but they're actually moving to dispose of the assets."

Small banks, which have heavy commercial real-estate exposure across the U.S., are also seeing the market for their bad loans open up.

Sun Bancorp Inc., based in Vineland, N.J., with $3.6 billion in assets, announced last week that it sold an $87 million portfolio of commercial real-estate loans to a group of investors for $55 million.

Private-equity firms such as Apollo, Colony, Lone Star Funds, and Starwood Capital Group have raised billions of dollars from pension plans, college endowments, and sovereign-wealth funds to buy souring real-estate loans on the cheap.

One strategy: acquire a large portfolio and then rework each loan individually, profiting after taking over the property or restructuring the loan.

Some of these firms have been buying portfolios from the Federal Deposit Insurance Corp., which has been taking over failed banks and has sold more than $22 billion in real-estate assets this year in deals that, like the Credit Suisse deal, often involve seller financing and profit-sharing arrangements.

But far more is still tied up inside U.S. banks. They currently hold on their balance sheets about $1.6 trillion in commercial real-estate loans, down from a peak of $1.9 trillion in mid-2008 but still above mid-2006 levels, according to the FDIC.

For Credit Suisse, the Apollo deal marks a major step in reducing a massive book of commercial mortgages the firm accumulated during the boom years as it made loans around the world that it planned to securitize and then sell off to investors.

In the summer of 2007, Credit Suisse had about $30.5 billion in commercial mortgages in its investment-banking division, according to the company's securities filings. With storm clouds forming over the global economy, the firm scrambled to reduce its exposure in the following months, cutting its exposure to $2.5 billion by the end of the third quarter of 2010.

The portfolio it is selling to Apollo has already been written down well below its face value, people familiar with the matter said.

Sweetening the pot for Apollo, Credit Suisse is providing debt financing for the deal, magnifying Apollo's return on its equity

Credit Suisse is also taking an equity stake in the joint venture formed with Apollo Management that is buying the loans, according to people familiar with the transaction.

That means the Swiss bank will share in both the risk and some of the upside as Apollo negotiates pay-downs with borrowers or takes over buildings, improves their operations, and sells them.