Tishman Speyer rival Brookfield buys debt in loan-to-own bid for DC assets

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

--------------------------------------------------------------------------------------------------------

One of Tishman Speyer’s rivals, Brookfield Properties, is taking a page out of the distressed investing playbook and buying up debt from Tishman’s Washington DC properties in a loan-to-own gambit, four sources familiar with the matter told Debtwire.

Tishman pitched original holders of the USD 570m loan a restructuring in September that would have given lenders a 50% stake in the DC assets and let the sponsors keep the rest. A group of insurgent lenders rejected the deal in December but Brookfield took no part in those events, said the sources.

It remains unclear when the commercial real estate investment firm first bought into the debt but it has recently emerged as one of the largest holders, the sources all said. The commercial real estate investor raised USD 12bn of external capital for investment during 2009, with the intent to “acquire assets in the bottom portion of this market cycle,” according to its 3Q09 shareholder report.

The USD 370m term loan backing Tishman Speyer Real Estate D.C. Area Portfolio (TSDC) traded around 60% of principal for most of 4Q09 before beginning a steep ascent after the lender group voted the sponsor plan down. The loan is now quoted around 80, the sources noted. Many of the lenders that turned down Tishman’s offer sold into the recent rally, three of the sources said

Brookfield isn’t the only real estate manager eyeing the DC properties, one of the sources added. Two other “strategic parties” have also recently submitted letters of interest to buy assets from the company and that is supporting the loan’s trading levels, he said..

Both Brookfield and Tishman declined to comment.

Beltway battle

Tishman Speyer’s battle over Stuyvesant Town may have overshadowed the restructuring of its Washington DC assets, but the workout for the loan facility backing the DC properties is no less contentious.

Tishman and co-investors, including Lehman Brothers and Caisse de depot et placement de Quebec subsidiary SITQ, paid Blackstone Group USD 2.8bn in late 2006 for the CarrAmerica DC portfolio, comprising 22 Washington, DC-area office buildings. The buyers funded the deal through a mix of CMBS, mezzanine debt, a USD 370m term loan and a USD 200m fully drawn revolver.

TSDC went delinquent on the loan last July when it skipped an interest payment. Despite the default, and the raging battle to control the real estate portfolio, the massive CMBS debt secured by the properties continues to perform well, according to CMBS data provider Trepp LLC.

After missing the interest payment, Tishman offered to make an additional USD 90m cash injection in the portfolio in exchange for lenders swapping USD 170m face value of their loans for a 50% equity stake. Under the deal, the remaining USD 400m of the loan would have been reinstated and the existing shareholders would retain a 50% stake.

The new-money would have funded the continuing redevelopment of the three core properties backing the loan, parts of which are under renovation and unoccupied.

The dissenting lenders opposed shareholders keeping a 50% stake for only USD 90m in new money, given that lenders would simultaneously forgive USD 180m of debt including accrued interest, the sources said. But the dissenting lender group lacked cohesion and did not agree on the structure of a competing workout plan, they added.

The consolidation of the TSDC debt in the hands of a strategic investor could remedy the collective action problem that handicapped the lender group. However, one lender expressed worry that if Brookfield accrues a blocking position in the debt, it could shut out other strategic parties from mounting competing bids.

For now, the ball remains in Tishman’s court, several of the sources speculated. The real estate giant could stand firm in its demand to retain a substantial ownership stake and even undergo a potentially messy bankruptcy process, they said. During talks late last year, Tishman and loan agent Scotia Bank had been seeking consents for a prepackaged Chapter 11 deal.

“The underlying assets have significant value, and there are numerous parties that are interested,” one of the sources commented.

Most of the 22 assets in the DC portfolio went to secure the CMBS, while the corporate loans got first lien on three office buildings. The loans were also pledged equity in 15 properties encumbered by other debt and equity in three joint ventures that own additional properties backing CMBS, according to Standard & Poors.

The three office buildings constituting the loans’ core collateral are 1730 Pennsylvania Avenue, 1775 Pennsylvania Avenue in DC and 1 Rock Spring Plaza in Maryland, according to one of the sources. Both 1730 and 1775 Pennsylvania Avenue underwent USD 20m renovations that were completed during the past year, according to DC public records.

--------------------------------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@debtwire.com or call Americas: +1 212-686-5374 Europe: +44 (0)20 7059 6113 Asia-Pacific: +852 2158 9731