The Distressed Debt Alert

Midland Unhappy with Innkeeper Bankruptcy Deal, Reuters Says

Midland Loan Services has complained to the U.S. Bankruptcy Court for the Southern District of New York that the proposed settlement of the Innkeepers USA Trust case would saddle it with a $300 million loss, according to Reuters.

Innkeepers, owned by Apollo Investment Corp., filed for bankruptcy protection earlier this month. Apollo acquired the hospitality company in 2007 at the height of the commercial real estate run up in a highly leveraged deal. According to Reuters, Apollo has already written off 99% of its Innkeeper investment.

Midland, one of the largest special servicers in the country, has an Innkeepers loan secured by 45 hotels that carries a value of $825 million, but in the prepackaged bankruptcy proposed by Innkeepers, Midland would only see $550 million in repayment.

The deal is also unfair, according to court papers filed Friday by Midland, because Lehman Brothers Holdings, the largest secured creditor, would walk away with all of the equity in the reorganized company and full repayment of a $238 million loan.

Lehman, which had its own bankruptcy, announced earlier this week it had agreed to sell 50% of its equity to Apollo for $107 million.

Source: News Story

The news coming from Fitch Ratings and research firm Realpoint on the commerical mortgage-backed securities (CMBS) market continues to trend negative.

In its weekly CMBS newsletter, Fitch puts the June default rate for CMBS at 9.48%, a jump of 133 basis points from the end of the first quarter. The ratings firm continues to forecast that the default rate will go double-digit to 11% by the end of the year.

Feeding the downward trend is 2007 vintage CMBS, which carries a cumulative default rate of 10.48. Fitch forecasts that rate will climb to 14% by the end of 2010.

Realpoint reports the delinquent unpaid balance on CMBS increased by $3.11 billion in June up to $60.45 billion. The unpaid balance for CMBS is up 111% from one year ago.

Source: Press Release

Goldman Sachs and Citigroup are circulating a term sheet among possible bond investors for a $788.5 million commercial mortgage backed securities offering, Reuters reports.

According to the term sheet, the average leverage for loans in the offering is just 53.7% and debt service coverage is 1.88, which indicates the package is underwritten to relatively conservative standards. On the other hand, 75% of the loan package is concentrated in retail properties.

Source: News Report

A joint venture between Citigroup and L+ M Development Partners plans to invest $100 million in affordable housing projects in New York City, according to American Banking & Market News.

L+M CEO Ron Moelis said the distressed asset fund will target 15 to 20 multifamily properties for acquisition, zeroing in on properties in danger of foreclosure. The fund will use lower leverage and expects returns in the high single-digit to low double-digit range, he said. Citigroup will contribute $95 million to the fund with L+M adding $5 million.

Source: New Story

American Safety Razor Co., a Cedar Knolls, N.J., manufacturer of wet shaving razors and blades, filed for Chapter 11 bankruptcy after reaching an agreement with its first lien lenders to purchase the company.

The first lien lenders will serve as the stalking horse bidder under a Section 363 sale, American Safety Razor said in a statement. The final transaction will be subject to bankruptcy court approval and is expected to be completed in the fourth quarter.

The company said it has $30 million in cash reserves and has secured an additional $25 million in debtor-in-possession financing to provide working capital during restructuring.

Source: Press Release

Thomas Properties, a Southern California real estate investor, recently went on a refinancing binge, successfully making moves on five different properties in a month's time.

Thomas, along with its joint venture partner California State Teachers Retirement System, began by negotiating a $350 million loan on the City National Plaza office building in downtown Los Angeles with MetLife and the New York State Teachers Retirement System. The new loan is due in July 2020 and carries an interest rate of 5.9%. CalSTRS also agreed to retire a $219 million mezzanine loan, converting into equity in the property. Before the transaction, the California pension fund had a 75% interest in City National Plaza, and now it holds 92%.

MetLife was also the lender on a $110 million refinancing of the San Felipe Plaza office building in Houston. The joint venture received a $1.7 million discount on the early payoff. The new note is due in 8.3 years and carries an interest rate of 4.78%. The joint venture also used a life company, Northwestern Mutual, for the $65 million refinancing of 2500 City West Blvd. in Houston. The new loan came with a $3.1 million discount applied to the payoff of the old note. The new loan comes due in 9.3 years and carries a 5.53% interest rate.

Wells Fargo originated a $55 million floating rate loan for the Brookhollow Central property in Los Angeles, with an interest rate of LIBOR plus 2.65% over three years.

Thomas also negotiated an extension for a construction loan on a Philadelphia condo property secured by the unsold units. The successor to shuttered Corus Bank, Corus Construction Ventures, agreed to extend the loan for one year with a fee of $275,000. The loan carries an interest rate of either 9.5% or LIBOR plus 3.25%, whichever is higher.

Thomas has come under fire for carrying too much leverage on its portfolio, so the refinancing could take some pressure off the publicly held, Los Angeles-based company. All of the refinancing was closed with less than 50% leverage.

Source: SEC Filing

Rep. Scott Garrett (R-N.J.) has introduced a measure to establish a market for covered bonds to the U.S., in the hopes of providing liquidity to the parched commercial real estate finance market, Dow Jones Newswires reported.

Covered bonds are popular in Europe for mortgage financing. The bonds are securities issued by lenders that are backed by a group of assets held within the lender's portfolio.

The legislation, which failed to make it into the final version of the financial reform bill, would create a regulator to oversee the new bonds at the Treasury Department. The regulator would define the assets backing the securities as well as which lenders would qualify as issuers.

The new legislation has bipartisan support and also has support in the Senate, according to Dow Jones.

The Commercial Real Estate Finance Council backs the legislation and has sent a letter supporting the proposed program.

Source: News Story

Distressed exchanges are helping investors recover higher returns on defaulted debt than they did in the two previous economic downturns, according to a Moody's Investors Service report.

Investors have recovered an average of 51 cents on the dollar on defaulted debt during the current economic downturn, which is four cents lower than the historical average of 55 cents, Moody's said. The recovery rate in the current cycle is better than the mid-40 cent range of recovery from the previous two downturns.

Moody's credited the stronger recovery rate to the high percentage of distressed exchanges completed by the first wave of companies to emerge from default in the Great Recession. Distressed exchanges typically yield higher recoveries than regular or pre-packaged bankruptcies, the report said.

Distressed exchanges occurred in 25% of the 57 defaults Moody's reviewed in its study. The report said recoveries would have been at record lows compared to previous recessions if distressed exchanges had not been utilized.

The report said recoveries by debt type were mostly in line with historical averages except for senior unsecured bonds, which averaged 31.2% recoveries, while the historical average for this type of debt was 40.3%.

Source: Press Release

Edwards Angell Palmer & Dodge hired Charles L. Glerum as a partner in the Boston-based law firm's restructuring and insolvency department.

Glerum will focus his practice on representing secured creditors, subordinated creditors and unsecured creditors in all phases of workouts. His past experience includes a stint as partner at Choate Hall & Stewart, where he was head of the firm's bankruptcy practice.

Source: Press Release

Global Capacity, a Chicago-based telecommunications services company, filed for Chapter 11 bankruptcy.

The company secured debtor-in-possession filing from a consortium of lenders, including Downtown Capital Partners and some holders of its secured convertible debt, Global Capacity said in a filing with the Securities and Exchange Commission.

The company said it plans to eliminate as much debt as possible by equitizing its balance sheet and reducing the monthly cash flow required for debt service. Global Capacity named Capstone Investments as its financial adviser to manage the reorganization.

Global Capacity provides information and services to help companies manage their telecommunications networks less expensively.

Source: SEC Filing

The Financial Times reports that private equity investor Apollo Management plans to open its own bank.

The new undertaking would be run by a group of former Countrywide Bank execs who were not on the sub-prime mortgage side of Countrywide's business.

While other private equity shops have been frustrated in their attempts to gain a foothold in the U.S. banking industry, Apollo is simply setting up its own shop which it plans to call Ares.

Under a provision in the new financial reform law passed last week, Apollo plans to open the bank without a national charter, the Financial Times reported. The firm plans to ask investors to invest along with Apollo to get around ownership restrictions that would otherwise have Apollo viewed as a bank holding company.

The new bank will operate independently of Apollo's private equity business, the Financial Times reported.

The Federal Deposit Insurance Corp. has made it clear that it prefers to sell the assets of failed banks to strategic buyers, rather than to private equity firms.

While some private equity plays have been made in the distressed bank sector, many players have been put off by FDIC regulations.

Source: News Story

Fitch Ratings is forecasting that eight commercial mortgage backed securities loans of more than $20 million each, coming due in August, will likely default.

The loans were originated in 2005, when loan originators were routinely front loading loans with interest only periods, or in the case of the loans Fitch is targeting, making them interest only for the length of the loan.

Fitch says that of the 772 fixed-rate CMBS loans due by December, 93 loans are already in special servicing.