In one of the highest profile examples of a loan default in the private real estate industry so far this year, a securitized loan which financed properties owned by US manager Blackstone in Finland has been placed into special servicing.
The transfer of the loan to special servicing followed two weeks of discussions between Blackstone and loan servicer Mount Street, which did not result in agreement on a plan for the repayment of the outstanding debt. Prior to that, on February 14, bondholders in the loan had voted against a proposal by Blackstone to extend the debt maturity by a year while it conducted a business plan for the underlying assets.
The senior loan was originated in December 2017 by US lenders Citi and Morgan Stanley to partially finance Blackstone’s take-private of Sponda, a Finnish real estate owner. The loan was securitized in April 2018 in the FROSN 2018-DAC commercial mortgage-backed securities issuance, which affiliate title Real Estate Capital Europe reported at the time comprised a €540.87 million portion of the €590.9 million senior loan. The loan had an outstanding balance of €297.1 million in December 2022, when rating agency Fitch downgraded the notes.
The properties financed by the CMBS loan constituted secondaries offices and retail assets located predominantly in regional locations around Helsinki. In total, Blackstone agreed to €2.6 billion of financing for the Sponda deal, with core elements of the portfolio financed in bilateral bank loans.
It is understood that Blackstone had intended to sell off the underlying properties. However, disruption caused by the covid-19 pandemic, which prevented prospective buyers from visiting the assets, delayed the business plan. Further, Russia’s invasion of Ukraine in February 2022 is understood to have further prevented sales with buyers hesitant to transact in Finland due to the country sharing a border with Russia. Wider market volatility is also believed to have played a role.
In January, as the February 15 loan maturity loomed, Blackstone requested the one-year extension, citing ongoing “macroeconomic instability and market disruption.”
Blackstone proposed a plan under which assets ready for sale would be marketed, with the remainder of the portfolio readied for sale in the coming months. In return, it said it would increase the senior loan margin by 1.25 percent per year, pay an extension fee equal to 0.25 percent of the outstanding senior loan, and enter an interest rate cap with an average strike rate of no more than 3.5 percent.
No reason has been circulated as to why the class A1 noteholders in the CMBS voted against the proposal on 14 February, although it is understood the omission of a capital injection in the business plan was part of the reason. All class A1 noteholders are believed to have voted, but the required 75 percent of votes was not reached.
Following two weeks of negotiations between Blackstone and Mount Street, the servicer announced on March 2 that the loan had defaulted and had been placed into special servicing.
The servicer said the borrower and itself had consulted on next steps and explored “further proposals” from both sides. However, it said no agreement had been reached on the terms of any further extension of the senior loan maturity date. It added the borrower had failed to repay all outstanding amounts by March 1, and that this final maturity repayment default had led to the loan being transferred into special servicing from March 2.
In a statement, a Blackstone spokesperson expressed the firm’s disappointment that Mount Street had not agreed to its proposal.
“This debt relates to a small portion of the Sponda portfolio,” the spokesperson said. “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.”
The future of the senior loan and the underlying assets now lies in the hands of Mount Street, which is mandated to act on behalf of the noteholders to maximize recoveries for them. It is believed that the servicer will remain in discussions with the sponsor, although at this stage, a resolution remains undecided.