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American Firms See Europe Woes as Opportunities

Nelson D. Schwartz|The New York Times
Monday, 26 Dec 2011 | 7:44 AM ET

As Europe struggles with its debt crisis, American businesses and financial firms are swooping in amid the distress, making loans and snapping up assets owned by banks there — from the mortgage on a luxury hotel in Miami Beach to the tallest office building in Dublin.

European Union Flag
Jonathan Kitchen | Image Bank | Getty Images
European Union Flag

The sales are being spurred on because European banks are scrambling to raise capital and shrink their balance sheets, often under orders from regulators. European financial institutions will unload up to $3 trillion in assets over the next 18 months, according to an estimate from Huw van Steenis, an analyst with Morgan Stanley.

This month a team of three bankers from the London office of the buyout giant Kohlberg Kravis Roberts headed to Greece to examine a promising private company that cannot get Greek banks to provide credit for future growth. The Blackstone Group agreed to buy from the German financial giant Commerzbank $300 million in real estate loans that are backed by properties, including the Mondrian South Beach hotel in Florida and four Sofitel hotels in Chicago, Miami, Minneapolis, and San Francisco. Commerzbank is under pressure from regulators to raise 5.3 billion euros ($6.9 billion) in new capital by mid-2012.

Google too saw an opportunity. It bought the Montevetro building in Dublin this year from Ireland’s National Asset Management Agency, which acquired it after a huge bank rescue by the Irish government.

“There is clearly a restructuring and shrinking of European financial institutions,” said Timothy J. Sloan, chief financial officer of Wells Fargo, which last month acquired $3.3 billion in real estate loans from a bank in Ireland. “And many of the assets they’re shedding are in the United States.”

He added, “We’re keeping our eyes and ears open for the right situations.”

American financial firms are taking the plunge in a troubled Europe despite problems of their own. In the last quarter, JPMorgan Chase, which has taken hits to its earnings, increased its total loans to European borrowers.

At Kohlberg Kravis, Nathaniel M. Zilkha, co-head of the special situations group, is expanding his London team to eight, from two, and hoping to take advantage of opportunities in Europe. The firm is even considering potential investments in the country where the crisis began, Greece, despite headlines warning of a default by Athens or the possibility that Greece may withdraw from the euro zone.

“If no one is willing to turn over the rocks, that’s when you can make extraordinary investments,” Mr. Zilkha said. “The market dislocation in Greece is creating significant opportunities that wouldn’t be otherwise available.”

Besides Greece, Kohlberg Kravis bankers have also been looking for deals in Spain and Portugal, where private companies are having a similarly hard time winning new credit or extending existing loans.

Ireland, whose banks were devastated by the collapse of a real estate bubble rivaling the one in the U.S., also has deep-pocketed American buyers like Google circling.

But in many cases, the assets are much closer to home.

Last month, Wells Fargo bought the $3.3 billion in real estate loans, which are backed by commercial properties in the U.S., that had been owned by the former Anglo Irish Bank. Wells has also bought $2.4 billion in loans and other assets from the private Bank of Ireland, which is trying to raise 10 billion euros ($13 billion) after a bailout by the European Union and the International Monetary Fund .

Even with opposition from consumer advocates, Capital One Financial could soon win final approval from the Federal Reservefor its $9 billion acquisition of ING Direct in the U.S., one of the year’s biggest banking deals. Based in the Netherlands, ING has been forced by European authorities to divest ING Direct, an online bank, after ING required a $14 billion bailout following the 2008 financial crisis.

Experts expect these kinds of sales to jump as European banks race to meet the June deadline imposed by the European Banking Authority to raise more than 114 billion euros ($149 billion) in fresh capital. Financial institutions also have to increase their Tier 1 capital ratio — the strictest yardstick of a bank’s ability to absorb financial blows — to 9 percent of assets.

Banks get a twofold benefit from unloading assets like real estate loans and other holdings; not only do they have more cash, but there are fewer assets they must hold capital against in case of losses, thereby quickly bolstering Tier 1 levels.

Investing in Europe is not without risk; a big bet on European sovereign debt helped bring down MF Global, which went bankrupt on Oct. 31.

And even as they jump into the new deals, some American banks must deal with their own woes, especially the overhang of soured mortgages from the subprime bubble and bust in the U,S.. Bank of America, for example, has raised billions recently by selling stakes in banks in Brazil and China.

At the same time, even the strongest banks, like Wells Fargo and JPMorgan Chase, are suffering significant earnings hits from weak demand for loans, moribund capital markets, and new regulations that cut deeply into lucrative fees on debit cards and other products.

But American institutions remain stronger than their European counterparts, said Christopher Kotowski, an analyst with Oppenheimer.

“Everyone is going to be cutting staff and shrinking capital commitments but the Europeans are doing it more,” Mr. Kotowski said. In large part, that’s because earlier in the U.S. financial crisis, Washington forced American banks to take huge write-downs, while raising tens of billions in fresh capital and halting dividends to conserve cash. European banks have been much slower to take those steps.

Besides buying assets from struggling overseas rivals, Mr. Kotowski predicts that firms like JPMorgan Chase, Citigroup and Goldman Sachs Group will capture more trading business on Wall Street, especially as French banks like Société Générale, Crédit Agricole, and other European institutions pull back.

French banks, in particular, have been heavily dependent on American money-market fundsto obtain financing in dollars. With many of these funds now pulling back from those loans, French firms are shrinking. This month, Crédit Agricole said it would exit the commodity trading business, while Société Générale said it was getting out of physical gas and power trading in North America.

Inside his firm, Stephen A. Schwarzman, the chief executive of the Blackstone Group, recently cited the $3 trillion estimate of how much European banks will have to unload, and this summer he told investors that Europe was back on Blackstone’s radar after being absent for several years.

“As people become increasingly negative on the environment there, we think we are buying good companies at very good values,” he said.

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