Blackstone Group rattled the market last week when it defaulted on a European commercial mortgage-backed security deal for the first time.
The U.S. private equity firm and servicer Mount Street failed to agree a one-year extension on a €297.1 million securitised loan backed by secondary Finnish offices. Market sources said bondholders are concerned the same could happen in other CMBS deals.
“If Blackstone is starting to get a bad reputation it is not easy to sell CMBS in the future,” said a market participant speaking on the condition of anonymity. “Buyers are limited; there’s only 20 or so guys in the market.”
Three U.S. banks have 67% of issued volume and Blackstone dominates the sponsor side with a 49% market share, according to a July 2021 research report by rating agency Scope.
Some market participants, however, were not surprised by the recent default. Blackstone earlier failed to reach an agreement with lenders against shopping centres in Ireland and the UK, but those loans were not securitised. Bondholders of the CMBS in question, FROSN-2018-DAC CMBS, could have seen this coming three years ago.
In April 2020, a month after the pandemic hit Europe, rating agency DBRS Morningstar downgraded the CMBS, saying the quality of the portfolio had deteriorated after Blackstone sold 15 of the best assets from a pool of 63 mixed office and retail properties. The initial portfolio had been valued at €887.7 million and was backed by a €590.9 million securitised loan by Citi and Morgan Stanley.
DBRS Morningstar pointed out that the sold properties represented 40% of the market value but only 22.1% of the total surface area when the deal was launched in 2018. It revised its cap rate to 8.3% from 7.5%. It also voiced concern about future rent collections as the pandemic swept through Europe and competition from new office buildings. The sale helped pay down the debt by around 50%.
Russia’s invasion of Ukraine in February 2022 made refinancing the loan ahead of the February 2023 maturity more difficult. Finland’s proximity to Russia would have deterred many lenders. Blackstone was seeking a one-year extension for the CMBS. Its Finnish property company, Sponda, which owns the assets, had proposed a business plan that divided the portfolio into properties that could be sold imminently and properties that needed more work before they could be sold.
Blackstone had proposed a 1.25% increase to the senior loan margin to 3.7% over the three-months Euribor benchmark rate, as well as the prepayment of the loan with all proceeds from sales and completion of sales milestones within six months after the vote, wrote Elena Rinaldi, a portfolio manager at asset manager TwentyFour, in a blog in early February. She does not know what was further discussed as her firm sold its notes last year. Servicer Mount Street had not provided further details on the default. Despite the specific problems of the FROSN deal, Rinaldi believes that Blackstone “could have done more to avoid this situation”.
Another market participant, also speaking on the condition of anonymity, agreed, saying: “It’s a negotiation at the end of the day; you have got to meet in the middle.”
Extensions in CMBS are not unusual. Bondholders tend to vote in favour if there is the prospect of getting their money back by implementing a convincing workout plan.
In 2012, Class A noteholders in the Opera Finance (Uni-Invest) BV CMBS agreed to roll over the debt and support a credit bid by new owners Patron and TPG Capital. The CMBS was secured against secondary and tertiary Dutch offices. At the time, the market was at rock bottom. Noteholders believed it made more sense to support a long-term approach with Patron and TPG than a consensual restructuring that involved a phased sell-off. Five years later, TPG and Patron sold Merin, the Dutch property company they had created from the ruins of the Opera Finance CMBS, to Canadian investor Dream Global.
With FROSN, both Blackstone and the bondholders have lost. So far, Mount Street seems to be the only winner as it can charge more fees for working out the portfolio as the loan moves into special servicing.
It is not the first time that Blackstone has failed to reach an agreement with its lenders. In 2020, it gave the keys back to the lenders on the €950 million Blanchardstown shopping centre in Dublin and the £190 million St Enoch Centre in Glasgow. FROSN is the first CMBS though, which raises the question whether more will follow.
Blackstone is not averse to extensions. In December, it received a one-year extension on its Italian retail CMBS, Pietra Nera Uno SRL CMBS. The servicer granted a loan extension to May 2023 from May 2023. Unusually, and luckily for Blackstone, there was no noteholder approval needed.
Bondholders can take some comfort from the fact that the other Blackstone CMBS deals are secured against better properties than secondary offices in Finland. They are mostly logistics and student housing.
(Updated on 8 March 2023 to clarify that Blackstone did not give up on the FROSN-2018 CMBS, but that it failed to come to an agreement with bondholders.)