The Blackstone Grp. L.P. Common Units Representing Limited Partnership Interests (NYSE:BX)
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A Blackstone Group LP (BX) property loan has received what "may be one of the more questionable [loan] modifications to date" by getting rosy financing terms at the expense of bondholders, marking a troublesome precedent for distressed real-estate workouts, Deutsche Bank said Wednesday.
Special servicer Berkadia Commercial Mortgage extended for two years the maturity on about $400 million of commercial mortgage-backed securities, or CMBS, debt on 16 office properties, leaving the interest rate unchanged at a level more than four percentage points below the market rate, Deutsche Bank analysts, led by Harris Trifon, said in a report.
The lower rate could mean reduced debt expense of some $50 million, if the borrower uses an option to extend the loan for a third year, the report said. What's more, CMBS loan principal wasn't paid down, Trifon said.
"It is the explicit financing advantage that the modification affords the borrower at the bondholders' expense," he said. "In return, investors in the deal get very little."
The modification, which Trifon said could be a model for other borrowers seeking improved terms, came six months after Blackstone bought debt to gain control of a portfolio of office buildings from a Morgan Stanley (MS) real-estate fund late last year. The Morgan Stanley fund acquired the portfolio when it purchased Glenborough Realty Trust in 2006 in a $1.9 billion deal.
The initial debt totaled $875 million, including $441 million of junior and mezzanine debt, Deutsche Bank said. Most of the mezzanine debt was retired in the modification, said a person familiar with the transaction.
The CMBS debt is part of some $70 billion that has reached, or will reach, maturity this year. A large portion of those loans are facing difficult refinancings because of low revenue or falling property value, leading servicers to embark on difficult balancing acts to get the best possible outcome for the trust.
Unlike many real-estate transactions from the peak of the market, the principal of the senior Glenborough loan isn't threatened, and debt service has eased, Deutsche Bank said.
But refinancing the loan might have been difficult. Blackstone took control of the portfolio at one of the rockiest points for CMBS lending since the market began its recovery from the financial crisis. As securitization costs rose, many lenders pulled back from the market that was a key source of funding for maturing loans.
Deutsche Bank questioned the modification because Berkadia, which took over special servicing from LNR Property LLC, required no equity infusion as done with similar workouts. Proceeds from any property sales would pay down the senior debt under the modified loan, however, according to the person familiar with the transaction.
The modification also included a "lockbox" account that will be used to pay down the senior loan, the person said.
A Berkadia spokesman didn't return a call or email.
-By Al Yoon, Dow Jones Newswires; 212-416-3216; email@example.com