Posted on 03/03/2023 3:17:30 AM PST by EBH
Blackstone has defaulted on a $562 million bond backed by Finnish landlord Sponda Oy, which it acquired in 2018, something Blackstone said was exacerbated by Russia’s war against Ukraine.
Blackstone had sought an extension from holders of the notes to allow for time to liquidate assets in the Sponda Oy’s retail and office portfolio to pay back the debt — which Blackstone bought for $1.9 billion in 2018 — but with ongoing warfare disrupting market conditions and sales, bondholders voted against the investment firm’s bid for more time, Bloomberg first reported.
Loan servicer Mountstreet said the debt would be transferred to a special servicer with Blackstone holding out hope that the value of Sponda Oy’s retail and office assets will help them prevail.
“This debt relates to a small portion of the Sponda portfolio,” Blackstone said in a statement. “We are disappointed that the servicer has not advanced our proposal, which reflects our best efforts and we believe would deliver the best outcome for noteholders. We continue to have full confidence in the core Sponda portfolio and its management team, whose priority remains delivering high-quality retail and office assets.”
Sponda Oy’s portfolio includes about 3.6 million square feet of office and retail properties spread across Finland. But the war in Ukraine, along with the continued office fall-out from COVID disruptions, made it harder for Blackstone to pay back the debt on the properties.
Finland’s potential membership in NATO, which became more likely Thursday morning, has been considered a key deciding factor in how the conflict with Russia plays out, with the country’s proximity to St. Petersburg offering the alliance a tactical advantage in the event of widespread conflict.
Fitch downgraded the notes in early December, highlighting the “macroeconomic outlook.” The downgrade made it difficult to find lenders willing to help Blackstone refinance against “illiquid assets” with the maturity date on the debt quickly approaching in February.
The recent trend of short-term debt being used by Scandinavian investors has also had onlookers on edge considering its vulnerability to rising interest rates, something which has also been exacerbated by the war in Ukraine.
Blackstone’s stock saw a rapid 3 percentage point dip Thursday morning but quickly recovered some of the progress it has made since reaching a 52-week low of about $72 per share in the last days of December 2022.
PS if you can’t figure Lehman out here is out it went. Banks buy a bunch of mortgages for X. Banks levered up - Lehman more than most. They package the mortgages together and CMBS over a few weeks and then sell them to investors for X + 1-2%. Works great with 50x leverage, as that works out to unbelievable profits. The banks counted on being out to get the CMBS off their books by selling them to fund their cash flow. However, within a few weeks, the CMBS debt went from very valuable to almost no value, and banks were stuck with what they had bought at face value. Given their liquidity relied on selling these assets every month, and every other asset they had besides US Treasuries was also losing value, they quickly ran out of cash. If you want the dumbed down version, simply watch the movie Margin Call, which is loosely based off Goldman Sachs in 2008.
Thanks for the movie suggestion. That isn’t what happened to Lehman.
You and I are viewing the Lehman transaction from two different perspectives. You seem to thinking in terms of a balance sheet (Assets = Liabilities + Retained Earnings). And I am coming at the Lehman failure from the perspective of their cash flow statement.
Stay with me- this gets into the weeds. But, I believe you will enjoy the exchange.
The liquidity of an investment bank is a DAILY battle. They must settle their trades DAILY and therefore they can’t wait for the selling of their MBS each month to fund their on going business. Yes they sell them. But the issue with Lehman was immediate. Thus the meeting of the investment banks, commercial banks, and the Fed the weekend before Lehman cracked. Lehman had no one wanting to lend them the capital on Monday to allow their clients to trade due to the uncertainty of Lehman collateral.
Think of it in these terms.
The investment bank must convert their holdings temporarily into cash to execute the trades made during THAT DAY. They don’t just hold the cash in their savings account each month. Instead they rely on repurchase agreements (REPO).
Those agreements are cash in exchange for collateral and are settled within hours. As Lehman collateral lost value each day other parties didn’t want to lend them the “cash” to settle their clients trades for that day.
Keep in mind that the collateral isn’t solely in the form of a MBS. It can be ANY type of security:
1) Corporate bonds
2) Covered bonds
3) MBS
4) Money market securities such as treasury bills and, in some countries, certificates of deposit (CD) and commercial paper (CP). However, CDs are not always popular because they represent an exposure to commercial banks and CP issues are difficult to use as collateral because they tend to be relatively small
5) Bank loans
6) Gold.
The Counterparty will base the cost of the cash (or the hair cut) given risk of not getting their cash back. Therefore the look at two key components
1) value of the collateral
2) the ability to quickly liquidate the pledged collateral.
If the Counterparty isn’t sure of those two considerations they will not trade with the other firm. Then that other firm CANNOT operate.
Now this is how contagion occurs- say you are holding that collateral (see my list above) and Lehman can’t return your “cash”. You now have to liquidate that collateral and the buyers know it is a distress sell because the collateral value is falling. Your firm now has to start selling other assets to cover your own trades for that day. This places those other securities in jeopardy of losing value as you are forced to sell them to satisfy your own liquidity needs.
So yes—-Lehman had too much debt. But as the value of that debt crashed their ability to obtain the necessary liquidity to operate each day is what caused them to file bankruptcy.
Back to my question regarding Blackstone being a modern Lehman…
Who is invested in their REITS and needs their “cash” that is gated by Blackstone? And what happens to that firms balance sheets as Blackstone (and the various real estate markets) REITS lose value because no one is willing to place funds with Blackstone?
If your still with me, I recommend you watch Too Big to Fail to see the weekend before Lehman failed and how the Fed scrambled to ensure market liquidity as they planned for the Lehman bankruptcy that following a Monday.
Good day.
$700k per year. Wow. You should have your own YouTube channel.
You trade that much and still have time to reach out to the ignorant and unwashed on FREErepublic to “spread” your knowledge.
We are blessed. Thank you for sharing your valuable time and thoughts.
Sigh, no you simply don't understand corporate finance, balance sheets and cash flow management. I am talking about all of them. The balance sheet issues led to the cash flow issues. Here I'll put it in as 5th grade terms as I possibly can.
There was a bank that had a balance sheet of $1,000 in cash.
This bank generated $100 in cash flow each month from normal activity like consulting and M&A. It had $200 in cash expense each month.
It also bought $50,000 in assets - lets call them mortgages - and sold them for $50,500 together as "super mortgage debt" with a higher rating. After selling the Super Mortgage debt, this bank paid for the mortgages they bought for $50k. Pretty sweet - $500 profit!
The $100 basic cash flow plus $500 in profit from Super Mortgages each month more than covered the $200 in cash flow expenses they had.
However, one day the value of the mortgages collapsed, dropping 25% in a couple of weeks. Now they only had $100 in cash flow to cover $200 in expenses. Good thing they had $1,000 in cash on the balance sheet! THey could survive for 10 months at least.
Oh No! The financial firms that invested their $1,000 at Lehman want their money back! Lehman can delay them but only contractually for a few months.
Oh No!It gets worse! They still owed $50,000 to the mortgage companies that sold them the mortgages! However, those mortgages were only worth $37,500 at that point! The mortgage companies then begin to force this bank to pay what it owed. The problem was this bank didn't have the cash with just a small $1,000 buffer as their loss on these mortgages was going to be over $13,000 and getting worse by the day!
In the end, the Bank's CFO realized the game was up, those assets were never going to go back to the value they bought them for and they went bankrupt. The end
I don’t make money trading. I am a senior finance executive for a large, well known global company. I also have a MBA from a Top 10 school with a Finance concentration and graduated Summa Cum Laude with a BS in Economics in undergrad. I speak with global banks every week, I’ve issued, refinanced and paid off billions of corporate debt. I make cash flow models a work of art.
Sound like you are a true “expert”. One in a million. You probably helped with your global company manage through the Covid financing. Even managed to keep them afloat as “we all managed this time together”.
You should be teaching the young minds of mush with your extensive CV. A real 2023 “Expert”.
I’m am lucky to have you let me sit by your side and learn. I am just surprised you never mentioned Repo. I mean a learned scholar as yourself. The rudder for one of the worlds global companies would at some point written the word “REPO”
Follow the link to learn more.
Good day
The loss of liquidity at the firms that were the biggest players in the securitized banking system ...led to the financial crisis.
The financial panic of 2007-8 stemmed from a run on the repurchase or “repo” market — the primary source of funds for the securitized banking system — rather than a run on monetary deposits as in earlier banking panics, according to a recent study by Gary Gorton and Andrew Metrick. Repo is a form of banking in which firms and institutional investors “deposit” money, by lending for interest, short term, and receive collateral as a guarantee.
https://www.nber.org/digest/dec09/repo-market-and-start-financial-crisis
You really should stop. I am not sure why you keep replying.
Don’t let your insecurity and failure to know everything about everything keep you wasting your time replying to lil ole me.
In the end, you will remain a fine person, and no one with thinks less of you for not knowing what triggered the crash. There are many things you could teach me.
This just isn’t one of them.
Good day
"The authors define "securitized banking" as the creation of structured bonds from bank loans, such as mortgages, which are then used as collateral for repo. <"/i>
Everything related to mortgages dried up, and when you are levered 50:1, you blow up very quickly with the kind of cash they needed to churn. Economists are a funny bird and usually miss the forest from the trees, it's why I went to get a T10 MBA rather than get a PHD in economics.
Kettle, black
Don’t let your insecurity and failure to know everything about everything keep you wasting your time replying to lil ole me.
LOL I haven't been insecure in anything since I was 15 but thanks for the laugh!
Yeah. I bet you look in the mirror and say I’m good enough, I’m smart enough, and doggone it, people like me! Don’t you, Stuart Smalley?
Because everyone knows that dropping your supposed pay, job title, education, employer and other tidbits about your background on the internet to a complete stranger while constantly attempting to belittle the person is probably one of the obvious traits of someone secure in themself. I’m surprised you didn’t share how big the tires are on your oversized truck. But perhaps you have limits too.
Meanwhile, the only thing you know about me is that I properly understand the cause of the crash of Lehman. And I gave you -free of charge- the material to help you learn so you don’t have to pretend any more.
So yeah. I am the highly insecure person that must brag about my fictional background in this exchange due to my raging insecurity. Now I need to run back to my dark room and wait for my mother to call me to dinner.
Turn out the light when you finish and have a good day.
LOL You don’t know squat about Lehman and I had already read that article, among with many, many, many others on the financial crisis. I still remember where I was when Bear Sterns collapsed, in fact. The reason I gave you my background was to let you know I am a financial expert, and I’ve probably spent no less than 1,000 hours researching the financial crises and tens of thousands of general finance experience and not just some random dude on the internet but you do you!
PS You do realize a repo is just a fancy name for short term debt, right?
You mean a fancy name for repurchase agreement is short for short term debt?
Ok.
Get some sleep.
A repo was simply short-term debt backed by things like mortgages with a promise to pay the lender after certain # of days. Mortgage company wants to sell you the mortgages they just issued, but you don't want to spend the cashs, so another entity lends you the money + interest and you repay them after you bundle them and sell them as MBS. This matches your cash outflows to your inflows and works great until that credit is gone. Supply chain financing is causing some angst for many companies this year as costs for that have gone from 2.5% a year ago to 8.5% a year ago (and its still available, repos disappeared because no one trusted the underlying value of the asset of mortgages), but fortunately most companies are not levered 50:1 like Lehman was and just hits their earnings a bit.
I’m trying to understand your point.
Are you trying to convince me that Repo is a loan? That no Repo transactions are offered any longer? That Lehman was caught with so much debt no one wanted to “lend” them any money? That Lehman had nothing to do with the Repo market?
The agreement to repurchase the collateral at a set price is a liability to the investment bank. And I will agree it feels like a loan. And I like to picture the transaction in my head that way (easier for my tiny mind to visualize the overall transaction that way)
But a Repo is not a loan nor a debt. But the selling of the assets with a promise to re-purchase (REPO) them. Generally within a day. Not months or years.
Here is another link (1) for you to study the subject of the cause of the failure of Lehman.
I don’t doubt anything you are sharing with me regarding supply chain financing. That is a fascinating topic I would enjoy learning more about in the future.
However, Repos have not disappeared. There is a large volume of Reverse Repos. But, there is still demand for Repo transactions. See the link (2), and you will find there were $2,634.6 BN US Primary Dealer Repo Outstanding in January 2020 alone.
Got to go for a swim now. I hope you have a great day.
1) https://www.nber.org/papers/w15223
2) https://www.sifma.org/resources/research/us-repo-statistics/
The issue was firms like Lehman would buy mortgages from firms like Countrywide, immediately borrow from other firms using a repo with a promise to repay them later, usually shortly after the date they expected to be able to bundle the individual mortgages as a Mortgage Backed Security (MBS) to be sold to investors. This allowed them to buy significantly more mortgages than they would have been able to do otherwise, hence the leverage issue. The problem was when the value of those mortgages plummeted, the proceeds from the sale of the MBS - if they could occur at all - was far less than it owed on the Repo. So then you have to figure out how to repay them from other cash - which again when you are levered 50:1 - provides zero cushion. Now, some Repos were tied to other assets such as Treasuries - which continued to be fine. And repos to your point still exist to this day - as do plenty of other forms of short term financing - I mentioned two in my current industry but there are plenty of others.
Repos are a common secured money market transaction. In a repo transaction, the Desk purchases securities from a counterparty subject to an agreement to resell the securities at a later date Each repo transaction is economically similar to a loan collateralized by securities, and temporarily increases the supply of reserve balances in the banking system.
Please don’t reply unless you spend at least a minute reading this basic explanation and the papers on the Lehman failure. You are beginning to be an irritant with you refusal to think beyond your preconceived idea of Lehman. Send your your response to the Federal Reserve Bank and the authors of the papers I have provided you
https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements
Good lord, you do realize what you just posted is exactly what I outlined except adding the reason why they wanted to do the repo. Im done with this conversation with someone so obtuse
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