Posts Tagged ‘Tony James’

Blackstone Defaults: Subprime Meltdown 2?

Sunday, March 5th, 2023

This story seems like it should be a bigger deal:

Blackstone (NYSE:BX) has defaulted on part of a €531M bond backed by a commercial portfolio owned by Finnish property investment firm Sponda, which it acquired in 2017.

The private equity firm has repaid almost half of that figure, closer to €300M, according to a person familiar with the matter.

Currently €297.1M of the loan remains outstanding, according to ratings agency Fitch. The loan is secured against 45 properties in Finland, most of which are offices and the rest are stores.

Blackstone (BX) earlier sought an extension from holders of the securitized notes so that it could sell the assets and repay the debt, Bloomberg reported citing people aware of the matter. The commercial mortgage-backed security has since matured, without being repaid.

A Blackstone (BX) spokesperson told Seeking Alpha that “this debt relates to a small portion of the Sponda portfolio. We are disappointed that the servicer has not advanced our proposal, which we believe would deliver the best outcome for noteholders.”

Translation: “Shut up and let us force our losses on you rather than taking them ourselves.”

Though off in Finland, this story should probably receive more notice due to the “mortgage-backed” angle.

Remember the 2008 Subprime Meltdown, fueled by easy taxpayer-backed Fannie Mae money and bundled subprime mortgage securities? And how all sorts of banking fatcats got bailed out and never paid a price for their shenanigans?

Well, mortgage backed assets never went away, they just moved into commercial real estate. There’s untold trillions of dollars in Commercial Mortgage-Backed Securities (CMBS) across the world, and almost no one is keeping track of them. The average retail investor probably knows less about CMBS now than they did about subprime mortgages in 2008.

And you know one of the hardest-hit sectors following the Flu Manchu lockdowns? Commercial real estate. A whole lot of companies figured out that a whole lot of their work force can work from home, freeing them from having to pay expensive rent on office space.

Add to that the fact that the way CMBS are structured has immediate negative consequences on several cities. Because the rules of many CMBS state that the value of a property doesn’t need to be reevaluated as long as the asking price per square foot doesn’t change, commercial real estate spaces stay vacant for years rather than lowering their prices, screwing would-be renters and shrinking tax bases. (Louis Rossmann has been ranting about this for years.)

Letting valuation get too out-of-whack with reality you get bursting bubbles and market panics. Blackstone Group is the largest commercial real estate owner in the United States. And they’ve been having other financial difficulties.

Blackstone Inc’s (BX.N) fourth-quarter distributable earnings fell 41% year-on-year as the world’s largest manager of alternative assets said on Thursday it cashed out fewer investments across key portfolios.

Blackstone has been dealing with rising redemptions at its flagship real estate income trust (BREIT), prompting the private equity firm to exercise its right to block investor withdrawals at 5% of the quarterly net asset value of the fund.

That’s not exactly a sign of unassailable strength.

Blackstone also gives political donations generously to both parties. Oh, and Chuck Schumer’s son-in-law works there. And Blackstone’s president Jonathan Gray and executive chairman Tony James were both big Biden backers in 2020.

I am very far indeed from being an expert on how Blackstone has structured its various holdings. I suspect that its various funds and trusts and CMBS are all well-siloed and isolated from each other, which is the smart way to do things. But The Biden Recession That Dare Not Speak Its Name, falling real estate prices, frozen rental prices and huge shift in the need for commercial real estate all point to some very difficult challenges for Blackstone to navigate.

Given the amount money Blackstone has spread around to the Chuck Schumers of the world, expect that there are going to be a whole lot of swamp creatures ready and willing to make any serious Blackstone financial problem into a big problem for the America taxpayer.