State-rescued German bank Hypo Real Estate is preparing to sell its public finance specialist Depfa, with Citi appointed to organise the sale, two people familiar with the situation said on Tuesday.
Hypo Real Estate has to sell Depfa by the end of 2014, and its pbb Deutsche Pfandbriefbank unit by 2015 as a condition for the European Commission's approval of its state bailout.
Germany nationalised the stricken real estate lender which collapsed in the aftermath of the Lehman Bros bankruptcy. Hypo Real Estate received a 10 billion euro capital injection in the wake of the financial crisis as well as 145 billion euros in liquidity guarantees.
Depfa, which has not underwritten new business since 2009, last year posted a net profit of 59 million euros. Depfa currently has a balance sheet total of around 73 billion euros.
Any buyer would get a large public finance portfolio.
Of Depfa's borrowers, 26 percent are regional governments, 24 percent public sector enterprises and 22 percent sovereigns. 24 percent of the portfolio stems from safe-haven Germany and 19 percent from the United States while 8 percent is made up of Spanish and 5 percent Italian debt.
Hypo Real Estate is likely to approach mainly investors such as private equity firms Lone Star, J.C. Flowers or Apollo for a potential acquisition of Depfa, one of the two sources said.
Last month Belgian 'bad bank' Royal Park Investments sold its structured credit portfolio to Lone Star and Credit Suisse for 6.7 billion euros ($8.7 billion).
In February 2012, a consortium of hedge funds approached Hypo Real Estate offering to buy Depfa for a fraction of the book value. While no deal materialised last year, the consortium continues to be interested, a person familiar with the investor group said.
Boutique advisory firm Moelis is advising the consortium. The investment bank declined to comment.
"It will not be an easy sell as investors are likely to demand a steep discount on the portfolio and Hypo Real Estate cannot afford to book a large writedown," a sector banker said.
Hypo Real Estate and Citi declined to comment.