IStar weighs pre-packaged bankruptcy filing
Commercial real estate lender seeks to restructure $8.6 billion in debt,
sources say; talks with creditors could begin next month.
Share Print Email Comment By Bloomberg News
(Bloomberg) -- IStar Financial Inc., the commercial real estate lender seeking
to restructure some of its $8.6 billion of debt, may seek bankruptcy protection
after creditors blocked it from amending loans, said people with knowledge of
the plan. IStar shares plunged as much as 25%.
The company expects to begin meeting with creditors in coming weeks to discuss
potential terms of a so-called pre- packaged bankruptcy, which wouldn't occur
until sometime next year, said the people who asked not to be identified
because the plan isn't public. IStar, led by Chairman and Chief Executive
Officer Jay Sugarman, hasn't yet held talks with creditors on a possible
bankruptcy. That process is likely to begin as soon as next month, the people
said.
IStar, which has a market capitalization of about $316 million after shares
lost more than 90 percent of their value since 2007, hired Lazard Ltd. and
Kirkland & Ellis LLP to advise on the debt restructuring, the people said. The
New York-based company made loans on properties including the Trump SoHo hotel-
condominium building in lower Manhattan.
"IStar grew as the markets shot up and concentrated in asset classes that are
particularly cyclical such as hotels and construction," said Ben Thypin, an
analyst at Real Capital Analytics Inc. in New York. "Their fortunes are closely
tied to the market and their future is now uncertain."
Bankruptcy is one option the company is weighing. It is also considering a
proposal to extend maturities on its debt as well as a potential exchange
offer, according to two people familiar with the situation.
Andrew Backman, a spokesman for iStar, didn't return a phone call or an e-mail
message seeking comment. Mr. Sugarman didn't immediately return a call.
Hedge funds that hold some of iStar's $2.9 billion of second-lien loans include
Silver Point Capital LP, Davidson Kempner Capital Management LLC and Monarch
Alternative Capital LP, according to two of the people. Some of the funds,
which are represented by Akin, Gump, Strauss, Hauer & Feld LLP, opposed iStar's
bid to amend terms of the loans to repurchase debt at a discount, the people
said.
IStar withdrew the proposed revision and has begun the process of planning for
a potential bankruptcy as it is faced with about $2.6 billion in debt coming
due next June, one of the people said. The company also has an optional $500
million first-lien debt payment due at the end of September that it may not
make, according to the person.
In a pre-packaged bankruptcy, a company negotiates terms of a reorganization
with its key stakeholders before filing for Chapter 11 protection, allowing the
proceedings to finish in weeks or months rather than years.
Representatives of Lazard, Akin Gump and Silver Point declined to comment.
Representatives of Kirkland, Davidson Kempner and Monarch didn't return
messages for comment.
The company had net debt obligations of $8.6 billion as of June 30, according
to a regulatory filing last month. IStar had about $3 billion of non-performing
loans as of June 30 and reported an $83.4 million second-quarter loss,
excluding income from property sales.
"Convincing lenders that iStar can repay its obligations in full at some point
down the road appears to be a tough sell due to uncertainty around the value of
its collateral," analysts at debt-research firm CreditSights Inc. wrote in a
report last month. "Negative earnings continue to be driven by the weak credit
performance of iStar's portfolio."
IStar foreclosed on nine properties during the second quarter and said loss
reserves totaled $1.18 billion, or about 16% of the loan volume it manages.
The company, a real estate investment trust, began in 1993 and was previously
called Starwood Financial Trust.
IStar's debt and equity plunged in the second half of 2007 as
commercial-property prices fell and capital markets seized up as losses on
subprime-mortgage securities spread to corporate bonds. Moody's Investors
Service in September 2008 cut the company's credit rating to below investment
grade.
While iStar shares have risen more than 55% this year, investors who held the
stock from the end of 2007 would have lost about 85 percent.
IStar fell 75 cents, or 18.7 percent, to $3.26 as of 2:36 p.m. in New York
Stock Exchange composite trading.
"The firm should not become insolvent and has ample liquidity to operate
through 2010, but management faces a significant challenge with $3 billion in
debt coming due in 2011 and $3.5 billion due in 2012," Standard & Poor's said
July 30.
S&P earlier said it believed there was a "likelihood" the real estate
investment trust would use a so-called distressed exchange to restructure the
debt maturing next year and in 2012.
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