The Distressed Debt Alert

Commercial Real Estate Investments Perform for Blackstone

Commercial real estate was a bright spot for private equity firm Blackstone Group last quarter

Blackstone's second-quarter results, released yesterday, showed that the firm had $23.8 billion in real estate assets under management last quarter and achieved a net return on its real estate investments of 17%. That compares with a negative return of 20% in the second quarter of last year.

Source: SEC Filing

Moving quickly to break an impasse between bond ratings agencies and issuers of securitizations, the Securities and Exchange Commission said it will allow securitization packages to go to market without a credit rating being attached to the filing for the next six months.

A portion of the 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act stipulates that if firms like Standard & Poor's, Fitch Inc. and Moody's Investors Service issue credit ratings for bonds flowing from securitizations of credit cards, auto loans or residential mortgages, those ratings would be assigned "expert status" and investors would have the ability to sue the rating firms should the investments sour.

Prior to the new financial overhaul, ratings were not termed expert and the rating firms were afforded more legal cover.

Each of the big three ratings firms made statements indicating that they would no longer assign ratings to new issues in light of what they said was unfair legal jeopardy.

The pronouncements lent fuel to speculation that new issues of commercial mortgage backed securities would meet the same resistance from the ratings firms, possibly stopping new found momentum in the CMBS market.

The SEC noted, in its statement released today, that its grace period does not change the newly passed financial reform law. Rather, the half-year was designed to give the ratings firms and securities issuers time to adjust to the new regulations.

Source: SEC Statement

Knight Capital Group, a Jersey City, N.J.-based financial services firm that advises companies on multiple asset classes including distressed debt, said that Gary Katcher, executive vice president and head of global institutional fixed income, has resigned.

James O. Smyth, an executive vice president at the firm, will assume Katcher's responsibilities on an interim basis.

Katcher joined Knight Capital two years ago with Knight's acquisition of Libertas Holdings, which was renamed Knight Libertas.

The company provides trade execution services and investment research to companies in a broad range of securities, including distressed debt, high-yield and high-grade corporate bonds, asset-backed and mortgage-backed securities, convertible bonds and syndicated loans.

Source: Press Release

The California State Teachers' Retirement System, the second largest public pension fund in the U.S., credited its shift from global equity investments to distressed and alternative investments as a big reason for a 12.3% annual gain in its investment portfolio.

CalSTRS said in a statement that the investment portfolio added $10 billion during its 2009-2010 fiscal year, after recording two straight years of losses of 25% and 3%.

The pension fund said that it positioned itself for ongoing recovery by temporarily shifting 5% of its portfolio from global equities to fixed income, real estate, and private equity to take advantage of the distressed market.

The fund also permanently shifted 5% of its portfolio from global equities to create a new absolute return asset class for inflation protection.

CalSTRS adopted a new asset allocation mix to further diversify the portfolio and reduce its stake in the global stock market, and it launched an innovations and risk unit to explore new investments such as a macro global hedge fund strategy, commodities and microfinance.

It also expanded its target asset ranges to avoid having to sell assets at losses.

The fund posted gains of 15.7% for U.S. equities, 12.1% for non-U.S. equities, 12.3% for fixed income, and 21.7% for private equity. The investment fund's real estate holdings had a 12.4% loss.

CalSTRS' investment portfolio consists 51.7% of stocks, 22% of fixed income, 14.5% of private equity, 10% of real estate, 0.9% of absolute return assets, and 0.8% of cash.

Source: Press Release

MarGulf Management, the Los Angeles-based real estate investment arm of Kuwait Financial Centre Markaz, has launched a new equity fund that will target the acquisition of distressed debt.

MarGulf said it will seed the new fund with $10 million of its own funds and hopes to raise $100 million. The projected return is 15% with an investment period of two years and a hold of four years. The fund acquired two loans last month in California.

Source: Press Release

GreenChoice Bank, a Chicago-based community bank, recapitalized and acquired Family Federal Savings of Illinois with the assistance of recapitalization specialists Newport Capital Bancorp.

Family Federal, a 100-year-old federal savings association, had been designated by regulators as a critically undercapitalized bank.

The savings bank will be re-branded GreenChoice Bank later this year, Newport Capital said in a statement.

The acquisition of Family Federal was completed through a rarely used method of recapitalizing a mutual savings bank called a voluntary supervisory conversion, according to Newport Capital.

MDI Investments, a corporate advisory firm for community banks, advised GreenChoice Bank on the transaction and brought in Newport Beach, Calif.-based Newport Capital to help finance the transaction.

Source: Press Release

Rep. Walt Minnik, (D-Idaho) told reporters at a U.S. Chamber of Commerce real estate forum that he is ready to introduce a bill aimed at adding liquidity to the commercial real estate market through a new program that would make as much as $25 billion in small-balance loans available, Dow Jones Newswires reported.

Under the program, the Treasury Department would guarantee bonds backing the loans that would be no larger than $10 million. The program would reap a 2% fee from each loan in the bonds. The bonds would have to carry an investment grade rating and the program would be phased out after three years.

Minnik claimed that the new program will find favor with the White House, but it's sure to face opposition from legislators wary of past bailouts, especially in light of the recent passage of the financial overhaul bill. The Idaho congressman said that three senators are ready to carry a like bill in the upper chamber. He plans to introduce the bill next week at the House Financial Services Committee, Dow Jones reported.

Source: News Story

Bowing to political pressure to wind down the Troubled Asset Relief Program, the Treasury Department is culling two programs, the Wall Street Journal reports.

The Term Asset-Backed Lending Facility (TALF) and a never-used small business lending program are being shelved, according to the Journal.

It was hoped that the TALF would jumpstart securitized lending, which in recent weeks has shown signs of new life. And the small business lending program is likely to be replaced by a $30 billion lending fund.

Source: News Story

Auditing and consulting firm KPMG said it expanded its restructuring advice capabilities with the acquisition of Grant Thornton's supply chain advisory services practice.

The transaction included Grant Thornton's Vontik software system.

KPMG said the acquisition will bolster its existing restructuring services practice in the automotive, pharmaceuticals, aerospace, defense, and other manufacturing industries. The deal expands KPMG's financial and operational restructuring, supply chain advisory, supplier services, technology and performance improvement services, the firm said.

KPMG will inherit 23 staff members from the supply chain advisory practice in the acquisition and will assume existing Grant Thornton projects at some Fortune 500 companies.

Source: Press Release

Toll Brothers, the national homebuilder best known for its developments that spawned the term "McMansions," wants to get into distressed investment.

The Horsham, Pa.-based company said it's launching Gibraltar Capital and Asset Management, a wholly owned subsidiary to pursue the acquisition of loan and property portfolios and property for development and sale to other builders.

Toll Brothers stayed in house, putting Roger Brush and Michael LaPat in charge of the new venture. Brush has dealt with distressed assets internally for the company for 17 years, while LaPat has operated out of the company's finance unit dealing in structuring and valuations.

The new vehicle hopes to source acquisitions from banks holding troubled residential development loans and to pick up construction and development deals gone sour from other builders.

Toll Brothers builds luxury homes on a national basis. It also has subsidiaries that operate everything from title companies to golf course development and engineering businesses.

Toll warns in its press statement announcing the new venture that some of its investments "may fall outside our core home building operations."

Source: Press Release

Commercial real estate prices rose by an average of 3.6% in May, Moody's/REAl Commercial Property Price Indices show.

It was the second month in a row that prices rose, as measured by the credit rating agency.

Commercial real estate prices are still off by 38.9% from their peak in October 2007 when credit markets froze.

Source: Report

Innkeepers USA, the Palm Beach, Fla.-based hospitality trust that Apollo Investment Corp bought in 2007, filed a pre-packaged bankruptcy, Bloomberg reported.

The company took on millions in debt when Apollo made its move three years ago and currently carries $1 billion in notes on 72 different hotels under the Hampton Inn, Residence Inn, Courtyard by Marriot, and Embassy Suites flags.

Bloomberg reports that Innkeepers has $67.5 million in loans from Five Mile Capital Partners and Lehman Brothers to get through the bankruptcy.

Source: News Story

Golub Capital BDC, a Chicago-based business development company and middle market lender, completed a $300 million term debt securitization, proceeds from which will be used to refinance the company's existing credit facility.

The transaction was executed through a private offering of approximately $174 million of Aaa/AAA notes issued by a subsidiary of the company and priced at 2.40% over LIBOR.

Source: Press Release