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LONDON (Reuters) - Cerberus, the private equity firm named after the mythical three-headed dog guarding the gates of Hades, is leading a charge by U.S. investors who are snapping up European loans at knockdown prices.
New York-based Cerberus Capital Management [CBS.UL] has bought more than 27 billion euros ($30 billion) of European loans in the last 2-1/2 years, acting along with rivals such as Lone Star and Blackstone (BX.N) to snap up commercial and residential debt from banks desperate to shrink or governments running down so-called "bad banks".
The trend looks set to continue.
"There's certainly another five years to go. We believe there's 2 trillion euros of unwanted loans across Europe sitting on banks' balance sheets," said Richard Thompson, head of the portfolio advisory group at consultancy PwC.
U.S. banks went through a similar process of selling sub-prime loans after the 2008/09 financial crisis and many big funds there built up expertise that has left them well equipped to raise cash and snap up the European loans coming up for sale, bank industry sources said.
Thompson said scale can give them a vital edge, with data on how one loan portfolio performs helping subsequent bids. "Over time the big players build up a data advantage, a reputational advantage, a track record with the main vendors, so I think they will continue to dominate the market."
But the sale of loans to private equity firms has attracted criticism, including accusations customers haven't been told when loans are transferred and the private equity firms are too aggressive in chasing repayments.
UK law firm Berg said in a report this month it had seen cases where businesses whose debts had been sold to private equity had been put under "huge pressure".
"They (private equity firms) are looking for quicker returns and aren't interested in relationships, whereas a bank historically looks at the lifetime of the client and what they can earn over a longer time," Berg partner Alison Loveday said.
Private equity firms, many of whom have bought specialist loan-servicing companies, will often take a different approach to collecting debts than banks and typically had a better record at it, sources said.
"A specialist servicer and people outside the banking system are less worried about setting precedents and therefore may say to a customer just pay me back 50 (percent) and we'll call it quits," one source said.
But Berg's Loveday said there was an imbalance between the power of banks to transfer loans and the rights of borrowers.
"A lot of business owners spend a lot of time choosing which bank to go with," she said. "And it can come as a huge shock to them (if the loan is sold on)."
Cerberus said it treats every borrower fairly and consistently. "Our preferred outcome is to keep the owners and tenants in place, establish a true value for the property, stabilize the asset and deliver true value for shareholders, owners and tenants," it said in a statement, saying consensual resolutions accounted for the vast majority of outcomes.
Most of the loans sold in recent years have been in Britain, Ireland and Spain. Those countries are expected to remain active as banks still face pressure to cut balance sheets and state asset management agencies still need to sell massive loan books.
Britain's state bad bank is selling a 13 billion pound ($20 billion) book of loans, while other big deals in the pipeline include GE Capital's UK loan book and Irish loans being sold by bad bank NAMA, RBS (RBS.L) and Lloyds (LLOY.L).
Elsewhere Italian sales are set to jump as banks seek to cut more than 180 billion euros in bad loans, while loans in central and eastern Europe could also be sold, such as a 2 billion euro Romanian book being sold by Erste Bank (ERST.VI), bankers said.
PwC estimates Europe's banks are likely to sell 100 billion euros of unwanted loans this year, topping a record 91 billion last year.
Cerberus has snapped up about 20 European portfolios since the start of 2013 to make it the biggest buyer of non-performing loans, according to real estate brokers Cushman and Wakefield.
Lone Star has bought loans with a face value of more than 20 billion euros in the last 2-1/2 years and Blackstone has bought about 10 billion, Cushman and Wakefield data show.
Apollo, Oaktree (OAK.N) and specialist investors such as Kildare Partners and Kennedy Wilson have also been big buyers.
The firms, however, only pay a fraction of the face value of the loans. Often banks have already written down the value of the debt and sell at two-thirds or less of face value.
Cerberus last week paid 41 percent of the 550 million pound face value for a portfolio of RBS loans; when it bought 4.8 billion pounds of Irish loans from RBS in December it paid just 23 percent of nominal value.
For banks, selling the loans can be attractive even at a steep discount, as it can release substantial capital they had to hold against the assets.
Mega deals, or sales of portfolios with a face value of 1 billion euros or more, are becoming more common and are almost always bought by U.S. investors.
Cerberus has won seven mega deals in the last 18 months, including a 5.6 billion euro "Project Eagle" portfolio from NAMA and 1 billion euros of Danish loans dubbed "Project Mermaid".
Investors can get annual returns of 15 to 20 percent on the right deals, although loans are now being sold at smaller discounts due to competition from bidders, sources said.
Cerberus declined comment on the returns it expected, but said it was a patient long-term investor with a 20-year track record of "successfully restructuring distressed real estate loans while supporting improvements to the underlying assets."
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Editing by David Holmes