The Distressed Debt Alert

NorthStar Clears Credit Facility

NorthStar Realty Finance, a real estate investment trust that originates debt and invests in real estate related securities, reduced its debt load by negotiating a payoff with Wells Fargo. The $304 million credit facility is now considered cleared, through a combination of cash payments and pledges of future revenue streams.

NorthStar paid $208 million in cash and the bank accepted a 40% interest in a €72.5 million ($91.7 million) participation in a mezzanine loan collateralized by a German retail portfolio. The bank was also granted warrants to buy 2 million shares of NorthStar for $7.60 each. NorthStar shares closed today at $2.92. The warrants expire in 2020.

Wells Fargo also agreed to attempt to source a new $200 million credit facility for Northstar. The REIT currently has an unrestricted cash balance of about $100 million.

Source: SEC Filing

Commercial real estate lender CapitalSource Inc. completed a deal to sell some of its equity interest and collateral management and servicing rights in a 2006 vintage collateralized debt obligation to NorthStar Realty. The deal may help CapitalSource clean up its balance sheet.

CapitalSource Real Estate Loan Trust 2006-A carried gross loans of $1.03 billion, including $926 million in third-party debt and $507 million in legacy commercial real estate loans. CapitalSource was holding $159 million in reserve against loans in the CDO to cover losses. While CapitalSource is realizing just $7 million in the transaction, the deal frees up the $159 million from reserves and frees CapitalSource from the risk associated with the $926 million in non-recourse debt. The Chevy Chase, Md.-based firm is retaining ownership of $124 million in bonds previously repurchased.

Source: Press Release

U.S. private equity mezzanine fund raising more than tripled in the first half of this year as 14 funds raised $4.4 billion compared to 10 funds raising $1.4 billion in the previous year's first half, according to Dow Jones LP Source.

The spike in mezzanine fund raising was in sharp contrast to overall private equity fund raising, which declined by 26% $45.1 billion in the first half of the year.

Source: Press Release

San Diego-based real estate investor Equastone has restructured $300 million worth of debt on a nine-building portfolio in the Dallas area.

Like a lot of equity investors, Equastone has gotten caught in a vice between plummeting real estate values and leaky cash flows brought on by a weak economy and increased vacancies. But a tumbling economy only tells part of the tale. Equastone's business model of buying buildings on a value-add basis and turning the assets in the short term hasn't fared well in a market marked by meager sales volume, lack of capital flow, and too much debt service.

The company has now adopted a new acquire-and-hold strategy, CEO Kirk Cypel recently told the Dallas Morning News. "You buy good assets and hold them," he said.

That and the fact that Equastone has favored the used of portfolio lenders over CMBS debt makes it easier to consider loan restructures, like the reworking of the $300 million of debt originally originated by GE Real Estate Capital for the acquisition of the Crescent Real Estate Equities Co. package acquired in 2007.

Equastone has also retained CBRE Investment Properties Institutional Group to track down fresh equity and find possible partners.

Source: Press Release

Tishman Speyer appears to be bouncing back from its default on the Stuyvesant Town and Peter Cooper Village apartment project in Manhattan earlier this year. The New York-based real estate investor has successfully restructured the debt on a Seattle office building, Bloomberg reported.

The company bought the building in 2007 for $230 million from Goldman Sachs Group's Archon Group. The Tishman purchase was one of four times the building changed hands that year, according to Bloomberg. One of the anchor tenants was the savings bank Washington Mutual, which went bankrupt in 2008. Since then, the building has been 15% vacant, according to Bloomberg.

The reworking of the debt is the third restructuring that Tishman has pulled off this year, according to the report. In Washington D.C., the company paid off $600 million in debt with the help of SITQ Inc. to hold onto a 28-building portfolio. In Chicago, Tishman restructured a $1.4 billion debt to retain a group of five office towers.

Source: News Story

Hedge funds that invest in distressed assets sustained significant losses in June for the second straight month, according to the advisory firm Hennessee Group.

The Hennessee Distressed Index, which tracks the performance of hedge funds that invest in distressed assets, declined 2.30% last month. The decline was more than the 1.35% drop in the Hennessee Hedge Fund Index, which tracks hedge funds of various strategies.

Hennessee said that distressed hedge funds suffered in June as long portfolios showed broad based declines. The advisory firm reported that while U.S. corporate defaults have slowed dramatically in 2010, managers are still optimistic for new distressed opportunities over the next five years.

Managers believe that many companies that have refinanced debt maturities have only delayed balance sheet problems that will arise in the next five years.

Despite the June decline, distressed asset investing is the third best performing hedge fund strategy this year with a 3.87% cumulative gain. The Hennessee Fixed Income Index and the Hennessee High Yield Index are performing better with gains of 5.69% and 4.42%, respectively.

Source: Press Release

Credit Suisse Group plans to spin off distressed corporate debt hedge funds Candlewood Special Situations and Candlewood Credit Value by the end of September, Bloomberg reported.

Source: News Story

Medical Staffing Network Holdings, a health care staffing company, said it filed a prearranged Chapter 11 bankruptcy after agreeing to sell its assets to its first lien lenders in a deal valued at $84.1 million.

The Boca Raton, Fla.-based company also secured $15 million in debtor-in-possession financing from its lenders to pay for restructuring costs and to provide liquidity to the company through the restructuring.

MSN AcquisitionCo., an entity to be formed by Medical Staffing Network's lenders, will credit bid for the $84.1 million purchase. The proposed sale is subject to higher and better bids at an auction.

Medical Staffing said it expects the sale to close before Aug. 31.

Source: Press Release