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U.S. Firms Eye European Bank Deals

American buyout firms are taking an interest in troubled banks across the pond.

TPG Capital is said to be in talks with the Bank of Ireland, according to published reports. Bank of Ireland faces a deadline at the end of July to raise €4.2 billion ($6 billion) in core, Tier 1 capital. Meanwhile, firms such as JC Flowers or Blackstone Group are seen by analysts taking a look at the nationalized British mortgage lender Northern Rock.

The U.S. interest in European distress is easy to understand. “The perception is that European banks are behind U.S. banks in cleaning up their problems,” attorney Ralph F. “Chip” MacDonald III, a partner in the financial services practice of law firm Jones Day in Atlanta, told Buyouts. “The gains go to people who invest earlier rather than later.”

Bank of Ireland is understood to be in advanced talks with U.S. investors, sister news service Reuters reported, citing a story in the Sunday Business Post. The newspaper, without quoting any sources, said the talks had advanced significantly in June and that the government had committed to selling a significant amount of its shares after a rights issue expected in July.

Bank of Ireland raised nearly half of the amount it needed when 74 percent of its junior bondholders took part in an early debt swap offer. The bank, in which the state has a 36 percent stake, said it raised nearly €2 billion in capital from the deeply discounted offer in which the vast majority of junior debt holders opted, as expected, for equity over cash. As well as hitting its junior debt holders, the bank is launching a government-underwritten rights issue and a potential state stock placing in its bid to find the capital demanded of it after stress tests in March.

As for Northern Rock, financial sponsors stand to face heavy competition from a range of strategic buyers. One popular view is that any buyer might want to combine the failed bank with the 600 branches being sold by Lloyds Banking Group, which itself is 43 percent owned by the British government.

Virgin Group head Richard Branson said in June that Virgin Money would consider bids for both Northern Rock and the Lloyds branches, which Lloyds has been ordered to sell by regulators as payback for taking a state bailout during the credit crisis, Reuters reported. New bank venture NBNK also has expressed an interest in both assets, while the likes of National Australia Bank UK and supermarket retailer Tesco’s banking arm are also seen as contenders.

Analysts said it could make sense for interested parties such as Virgin Money and NBNK to look to snap up both assets. However, analysts said it could be hard for such foreign banks to get boardroom approval for this type of overseas acquisition, given the fragile nature of the UK economy. “It will be much more difficult for them to get their boards to approve something as risky as this, which is a bet on the UK economy,” said Mediobanca analyst Christopher Wheeler.

They added that Virgin appeared best placed to get both Northern Rock and the Lloyds branches, given the relative strength of the Virgin brand in Britain over that of foreign banks, private equity firms or start-up banking ventures such as NBNK. “The Virgin brand is quite powerful,” said Espirito Santo analyst Joseph Dickerson.

The Bank of Ireland deal is of particular interest to U.S. buyout shops because the bank is a significant player in the U.S. leveraged lending market, having opened an office in Chicago in 2008. Some observers have questioned the future of that business in the case of a sale to a financial sponsor.

Others doubt that a change of ownership would make a difference, in and of itself. Indeed, a range of buyout firms, including Audax Management Co. LLC, The Carlyle Group and TPG itself already have holdings in the financial services industry, and there is no indication it has affected their lending programs, Tom Gregory, co-founder and managing director of the Chicago leveraged lender Maranon Capital LP told Buyouts. “All of those guys have diversified asset management businesses.”