Blackstone defaults in Nordic CMBS as property values ​​wobble


(Bloomberg) — Blackstone Inc. defaulted on a 531 million-euro ($562 million) bond backed by a portfolio of Finnish offices and shops as rising interest rates hit European property values.

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Blackstone, which acquired lessor Sponda Oy in 2018, sought an extension from the holders of the securitized notes to divest the assets and pay down debt, according to people with knowledge of the plan. The bondholders voted against a further extension, the people said, asking not to be named as the sale process was not public.

Property values ​​are falling in Europe as rising interest rates discourage buyers until a clearer picture emerges of how much rates will rise. That has led to wide gaps between bids and asks, reducing transaction volumes and putting pressure on homeowners with maturing loans. About a third of all commercial mortgage-backed securities loans due in 2023 and 2024 face high refinancing risks, according to a study published by Scope Ratings in January.

Concerns about how much values ​​could fall are encouraging lenders to push sales faster, while borrowers would prefer more time to seek higher offers for their properties. The price decline so far has not led to widespread credit losses, so some creditors are betting that quick sales can still ensure the debt is paid off in full.

“This debt relates to a small portion of Sponda’s portfolio,” a Blackstone representative said in an emailed statement. “We are disappointed that the servicer has not advanced our proposal, which reflects our best efforts and we believe that he would provide the best outcome for noteholders. We continue to have full confidence in Sponda’s core portfolio and its management team, whose priority remains the delivery of high-quality office and retail assets.”

The Nordic property sector has been at the forefront of Europe’s property correction after a long period of relative calm following the global financial crisis. Investors have been spooked by homeowners’ use of short-term debt, making them more vulnerable to rising rates. The level of cross-ownership in the sector, where various real estate companies own stakes in each other, has also exacerbated concerns.

In the US, where valuation declines have been more severe and rates have been higher for longer, homeowners such as Pacific Investment Management Co.’s Columbia Property Trust and Brookfield Corp. have also defaulted on mortgages. The US office market has been hit particularly hard by the pandemic-induced shift to work from home.

Read more: Defaults by Pimco and Brookfield offices point to worsening property problem

Blackstone’s notes are now due and unpaid, prompting the Mount Street loan servicer to determine a default, according to a statement Thursday. The loan will now be transferred to a special servicer, he added.

Blackstone acquired Sponda for almost 1.8 billion euros in 2018.

Fitch downgraded the ratings in December, saying that “weak macroeconomic prospects and limited appetite for lending against illiquid, secondary-quality assets” create significant challenges for refinancing.

The loan was originated by Citigroup Inc. and Morgan Stanley and is secured by 45 properties in Finland, most of which are offices. At the time of the downgrade, 297.1 million euros of the senior loan remained outstanding, according to Fitch.

The portfolio is about 45% vacant, having risen about 10 percentage points during the pandemic, according to the report. Travel restrictions then hampered Blackstone’s sales efforts before the war in Ukraine triggered a new wave of volatility.

–With the help of Alastair Marsh.

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