Blackstone deal offloads £1.4bn of RBS's riskiest debt

Royal Bank of Scotland is preparing to offload £1.4bn of high-risk debt after striking a deal with the private equity company Blackstone.

Under the deal – expected to be signed off within days – Blackstone will take a 25 per cent stake in a new vehicle set up to hold the loans – which are some of the riskiest "non-core" assets on the state-owned bank's books. The 30 loans are largely commercial mortgages lent against property such as pubs, car dealerships, nursing homes and parking lots.

The remaining 75 per cent of the new vehicle will be held by RBS, but it plans to sell down its stake if and when the value of the loans improves.

It is understood that money to cover the bank should the loans default has already been set aside under its regular provisions for bad debt. Management are understood to be holding back on selling more because the bank would have to take a substantial hit on their value were they to do so now.

The mortgages are all for amounts of at least 90 per cent of the value of the properties they are lent against. It is expected that at least some of those properties will be sold by Blackstone – whose distressed debt specialists will manage the portfolio – while remaining loans will require restructuring.

Management want to get the loans off RBS's books as soon as possible as they seek to return the company to private ownership. However, they will not be able to do this until they are able to sell down the bank's stake to under 50 per cent.

RBS was one of the most aggressive lenders to the commercial property sector in the run up to the credit crunch. It has had to take substantial impairments against its £80bn loan book, more than half of which is now considered "non core".

The loans it is selling hit trouble during the financial crisis as the value of commercial property tumbled.

The terms of the deal – including the price paid by Blackstone – are unlikely to be disclosed, although the discount to the loans' face value is said to be "substantial".

Neither RBS nor Blackstone would comment yesterday. But Blackstone is thought to have seen off rivals including Loan Star, Westbrook and KKR with RBS in talks over a deal for the best part of a year.

While the arrangement has been described by bankers as "innovative", deals between banks and distressed debt specialists have proved highly controversial in the past.