Blackstone Hoping to Renegotiate Hilton Debt

I give Blackstone bonus points for attempting to fix its pesky $20 billion Hilton debt problem before the crud actually hits the fan. Apparently, the private equity group is hoping to convince holders of the debt to make some minor adjustments, like swapping their crappy debt for crappier equity, or extending maturities out even further, maybe until 2050 when the commercial real estate market starts booming again. Blackstone is even offering to contribute $800 million in additional equity to buy back debt at a discount. So many fancy accounting and financing tricks, so little time. The problem is it is hard to escape a turkey of a deal like the Hilton LBO, that was struck during the fairy tale days of the credit bubble. Unfortunately, it is hard for us to escape the Hilton LBO as well, for the Fed owns $4 billion in Hilton bonds, courtesy of Bear Stearns, via that awesome $29 billion risk-free loan the Fed gave to JP Morgan so it could purchase the more solvent portions of Bear. The only good news is that the terms of the debt limit Blackstone's ability to repurchase Hilton debt.

Blackstone is hoping to cut the debt load by $5 billion, as I'm sure that will make its equity portion worth more. After already writing off the investment by two-thirds, Blackstone needs all the help it can get to make its investors whole. I wish them luck with their negotiations. Personally, as a senior debt holder, I'd tell them to take a hike. Maybe cough up another $5 billion in equity? Then we can talk.

Mr. Bernanke is probably just getting a phone call right now from Steve Schwarzman asking him to take a haircut on the Fed's Hilton debt. Mr. Bernanke wonders out loud "How'd we wind up owning Hilton bonds?" An assistant whispers something in his ear. He sighs, then picks up the phone to call Blackrock, to find out what to do...

A Couple of Commercial Real Estate Anecdotes

Here's a quick follow up to my post yesterday about two former Harry Macklowe-owned office properties in Manhattan, the Worldwide Plaza and 1540 Broadway.  Apparently the deal between Fillmore Capital Partners (the holder of the mezzanine debt on the defaulted properties) and Deutsche Bank (the former holder of the senior debt and current owner of the properties) could not reach a deal.  The contract was expected to be signed yesterday, but for some reason the parties didn't finalize the deal.  According to the article in the Wall Street Journal, Deutsche Bank has been trying to sell the properties since early 2008 when Macklowe defaulted and handed over the buildings.  The bank supposedly had bids in hand above $2 billion when NBC Universal walked away from signing a lease in the Worldwide Plaza.  To quote the Journal "That discouraged potential buyers who calculate returns on investment based on how much cash buildings generate from rent collections."  I like that.  Potential buyers in 2008 and 2009 apparently like to calculate returns based on actual cash flows from the building.  Whereas commercial real estate investors prior to the credit crunch calculated returns based on imaginary ponzi fairies that visited them in their dreams.  This sort of explains why we have a credit crisis.

Calculated Risk reports, via the Boston Globe, that the John Hancock Tower in Boston will be auctioned off March 31st.  The Hancock Tower was part of the Broadway Partners 2006-2007 leveraged buying frenzy.  Broadway paid $1.3 billion for the building in 2006 and the current value of the building is estimated at between $700 and $900 million.  Something about cash flows and rent being related to valuation...I'll have to check my notes.  In any event, anyone interested in bidding on this one, give me a call.  I've been looking to acquire a trophy property or two, but I'm a little short on the cash.  If we rub a few cents of equity together, line up the financing from Deutsche Bank, then maybe Deutsche can just shovel it into the TALF, and it's a win for everyone.  Well, almost...

Then again, maybe we don't want to bid too soon.  After all, the carnage in the commercial real estate market is really just beginning.  A friend sent along a link to a great article in DealBook yesterday about the wreckage following Sam Zell's ingenious sale of Equity Office Properties to Blackstone Group for $39 billion in 2007 (aka "the top".)  Blackstone flipped hundreds of the buildings for $27 billion to several overeager buyers.  Many of the 16 companies that bought Equity Office buildings are now stuck with significant debt while the value of the assets are plummeting as they struggle to fill empty office space.  Harry Macklowe was just the first to blow-out.  Maybe I'll wait to make a move on that trophy property purchase after all...    

     

Woe is Private Equity

Blackstone Group, the world's largest public private-equity firm, posted a sizable quarterly loss today, shocking even the most pessimistic analysts' estimates.  The company posted a net loss of $340.3 million, compared with a profit of $234 million a year earlier.  I must admit that the only thing shocking about Blackstone's loss is that it isn't significantly higher.  According to Bloomberg's report on the earnings announcement, the company wrote down its corporate holdings by about 7.5% and its real estate investments by 9%.  Since the beginning of the year, the firm has reduced the value of about a third of the 40 companies it owns.  Seriously?  It has written down the value of ONLY one third of its portfolio?  I admit I haven't a clue as to what assets Blackstone owns, but I can throw out a few thoughts that might put it in perspective: 

• S&P and Dow down over 35% YTD
• Commercial real estate prices down at least 15-20%, although nobody even knows because NOTHING IS TRADING
• All LBO debt getting marked at around 70 cents on the dollar, although even this is highly suspect as very little is trading
• Zero financing available for any new deals

So really, are we sure that we only want to mark down that commercial real estate by 9% and the corporate portfolio by a mere 7.5%, or are we going to put the crack pipe down and start talking some real numbers?  If that weren't enough, as I mentioned in my last mockery of Blackstone back in May, the company expects to post net losses during the next five years due to vesting expenses.  Why anyone is willing to subsidize insane compensation costs just for a "piece of the private equity pie" is beyond me and yet people buy this stock.  Who are these people?  Even at $7.55 a share, who on earth thinks this is a good business model anymore and that the company's biggest losses are behind them?

The Wall Street Journal had a great story about Blackstone Group's LBO of Hilton Hotels completed roughly a year ago.  It is certainly worth a read for anyone who has forgotten how preposterous the private equity boom period became.  Blackstone put in $6 billion of equity, its largest investment to date, and financed the balance of the $26 billion takeover with debt.  Blackstone paid 13 times estimated 2008 pre-tax cash flow for the company (translation: steep.)  Mind you, this was five years into an economic boom that was already looking tired when the deal was done.  Currently, the hotel chain's closest rival, Starwood, trades at about seven times before-tax cash flow.  The best part, the part you're really going to love as a US taxpayer, is that $4 billion of Hilton's LBO debt now sits on the Fed's balance sheet and we own it.  Apparently the Hilton LBO debt is part of the $30 billion in illiquid assets that the Fed guaranteed for JP Morgan when JP bought Bear.  The funny thing is that Lehman also held some of the Hilton LBO debt when it went bankrupt.  No doubt the bankruptcy court is working on finding a bid for the garbage so that Lehman creditors can be repaid.  Maybe the Fed can buy it and add it to the kitty.

At least the backlash against the private equity community is in full swing.  President-elect Obama will more than likely try to increase taxes on private equity investors from the long term capital gains tax rate to the ordinary income rate.  But not to worry, these guys won't see capital gains again for a really long time.    

Blackstone Posts Loss That Confounds Analysts

Blackstone Group, the publicly traded asset manager widely known for its buyout business, reported a loss of $66.5 million attributable to declining fees in every single one of its businesses. The first-quarter loss, which excluded some compensation costs, was $.06 a share, compared to average estimates of $.12 a share profit that analysts had been expecting. Profits? From a private equity firm? Did the analysts' Wall Street Journal subscriptions expire in December? Blackstone completed exactly one leveraged buyout in the quarter for $1.2 billion, compared to $42 billion in deals the previous year. Furthermore, revenues declined by 94% in its real estate business and its buyout funds. The hedge-fund unit was the real performer with a revenue drop of only 81%. Those guys should expect a big fat bonus. Speaking of compensation, Blackstone's net loss was actually $251 million including costs related to the vesting of executives' ownership stakes as part of the initial public offering in June. Let's see, really lousy asset management performance, yet really high compensation costs. I'm sure if performance turned around, compensation would increase even more. Very interesting negative and positive correlation between compensation and performance. The company expects to post net losses during the next FIVE YEARS due to vesting expenses. Anyone who still wants to buy the stock after reading the last sentence may be interested in investing in a partially completed condo project I'm working on in Las Vegas. Please call me.

Ex-Trader Charged With Spreading False Rumors

Ripples of terror reverberated around Wall Street trading desks yesterday when the SEC accused a former Schottenfeld Group trader with spreading false rumors about Blackstone's proposed takeover of ADS. The SEC demonstrated firmly that it is not messing around with rumor-mongering by going after this pea-shooter whose total profits on the offending trades were $25,000. It is certainly true that Mr. Pea-Shooter (aka Paul Berliner) did make up rumors about a supposed meeting that never took place between Blackstone and ADS. He then forwarded those rumors to 31 of his closest friends ( who are all brokers) through instant messenger. He also shorted the stock at around $77 and watched it fall in response to the spreading of his rumors. However, those who listened to Mr. Pea-Shooter and sold their stock in a panic, or even shorted it, should send this guy a thank you note. The Blackstone/ADS deal never happened and ADS is now a $57 stock.
There are many who believe that Wall Street is built on a firm foundation of rumor-mongering. If traders didn't spend all day making up rumors to support their trading positions, their productivity levels would drop markedly. Within many of these rumors, however, lies a kernel of truth. Finding that kernel is considered part of the game. Were traders spreading rumors about Bear Steans going bankrupt? Absolutely. But Bear Stearns was eventually forced to find a white knight to rescue it. Will the SEC go after those rumor-mongers? Or is it not illegal if the rumors become a self-fulfilling prophecy? Every investment bank relies to varying extent on borrowing in the money markets to finance its trading positions. Theoretically, any investment bank can go bust over a crisis of confidence. Lehman, who was also apparently the target of viscous rumors during the height of the panic in the credit markets, emphatically put its foot down and raised capital to avoid winding up like Bear. Does the SEC go after those who spread rumors about Lehman but not Bear just because Lehman's management did a much better job of dispelling the rumors of its "potential" insolvency? The answer is obviously not straight-forward. But whatever it is, you didn't hear it from me.

Blackstone loses $170m, Schwartzman regrets expensive birthday party

Actually only the first half of the headline is true.  Blackstone Group really did lose $170 million last quarter but I doubt if Steve Schwartzman regrets spending $3 million on his 60th birthday party, the highly publicized event on 2/13/2007 that curiously marked the end of the private equity boom.  Why do the earnings of the private equity group even matter?  Because its lousy earnings are a proxy for all private equity earnings.  Lousy earnings coupled with an impossibly difficult deal environment translate into fewer deals which lead to less business for Wall Street.  Less business for brokers means less fee revenue to help offset all the write-downs they have to take on their inventory.  This does not bode well for the quick recovery in bank earnings that most chipper analysts were expecting due to the fed interest rate cuts...