Blackstone's US$560 million CMBS default, where does the financial pressure come from?

560 million US dollars, Finland, European real estate, formed the key words of the Blackstone default event. 560 million US dollars is the scale of this default, and behind the incident, a Finnish company is also involved, as well as bonds backed by the commercial real estate it owns.

On Thursday, loan servicer Mount Street ruled that Blackstone's CMBS, or commercial real estate mortgage-backed securities, was in default. This kind of bond has the same principle as the mortgage-backed bond (MBS) that we are familiar with. It is to package various commercial real estate loans, make bonds and sell them to investors.

The commercial real estate behind these defaulted bonds comes from the Finnish company Sponda Oy. The company was acquired by Blackstone Group for nearly 1.8 billion euros in 2018, and Blackstone made this acquisition to expand its business in the Nordic real estate market. So in essence, Blackstone Group undertook Sponda Oy's commercial real estate and all its debts, and then used these commercial real estate bonds to issue notes to investors. The advantage of this is that Blackstone can quickly withdraw funds and continue to invest. However, it may not have thought that it would fall into the pit so soon. According to people familiar with the matter, Blackstone tried to negotiate with creditors, hoping to extend the time to sell assets and pay off debts, but was ruthlessly rejected.

So why did Blackstone, the world's largest alternative investment fund, come to this point? This may be related to three factors. One is that rising interest rates are weighing on property prices. Bloomberg reports that people who invest in commercial real estate are becoming very hesitant because of interest rate uncertainty. As a result, the price difference between buying and selling real estate in Europe is getting wider and wider, and the transaction volume is very sluggish. On the other hand, many lenders who already own commercial real estate are under great pressure. Because about one-third of the loans will need to re-rate this year and next.

The second is the characteristics of Nordic real estate companies. Locals prefer floating loans because they are usually shorter term and have less early repayment penalties. In the low interest rate environment, for real estate companies, the operating cost is lower and more flexible, and assets can be sold at any time to repay the loan. However, such characteristics are not available in today’s environment. Rising interest rates have made the cost of holding these real estates very high, and some investors have therefore competed to sell assets with low returns, reducing the overall price. .

The third is the impact of mixed office on commercial real estate. After the epidemic, the vacancy rate of these commercial real estate is very high. According to a report by the rating agency Fitch, the vacancy rate of the properties owned by Blackstone is as high as 45%. This made their rate of return very poor, and when Blackstone wanted to sell it some time ago, it was affected by the Russia-Ukraine War and did not find a suitable person to take over.

The news underscores the downturn in the real estate market, especially commercial real estate. Not only in Europe, but also in the United States, commercial real estate is affected by high interest rates and mixed office, and the value is shrinking sharply. Another large real estate company, Brookfield, also announced a default last week. He bought two 52-story office buildings in Los Angeles with loans, and the defaulted loan amount exceeded 750 million US dollars. And I believe that as high interest rates continue, there will be more and more such incidents. However, at present, the scale of these defaults is not large, and they are still within the controllable range of the company. It will not affect the entire financial market for the time being. But there is a new risk worth noting.