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U.S. Stocks Decline as Energy Shares Tumble on BP Concern

by on June 9, 2010

By Esme E. Deprez June 9 (Bloomberg) — U.S. stocks fell, with declines in energy and banking shares wiping out early gains, as the cost to protect against default by BP Plc rose to a record amid concern over the fallout from the Gulf of Mexico oil spill. BP ’s U.S. shares slid 16 percent, the most since at least 1980, amid concern the company will need to cut its dividend to pay for the worst oil spill in U.S. history. Anadarko Petroleum Corp., which has a 25 percent stake in the leaking well, slid 19 percent to a 15-month low. Exxon Mobil Corp. and Bank of America Corp. lost about 2 percent as energy producers and financial companies also turned lower after the Federal Reserve’s Beige Book survey said economic growth was subdued. The Standard & Poor’s 500 Index lost 0.6 percent to 1,055.69 as of 4 p.m. in New York after rallying 1.5 percent earlier. The Dow Jones Industrial Average decreased 40.73 points, or 0.4 percent, to 9,899.25, reversing a 125-point gain. “People are just traumatized,” said Fritz Meyer , a Denver-based senior market strategist at Invesco Ltd., manager of the Aim and PowerShares funds, which has $580 billion of assets under management. “The wall of worry today is bigger than almost any other time I can remember.” Stocks rallied in morning trading after Reuters reported China’s exports jumped about 50 percent in May and Fed Chairman Ben S. Bernanke said the central bank will act as needed to aid the economic recovery, spurring speculation policy makers are in no hurry to raise interest rates. ‘Unnerving, Unsettling’ The S&P 500 ended a whipsaw day yesterday with a 1.1 percent gain as a commodity-market rally boosted oil and metals producers. The measure is down 13 percent from this year’s April 23 high as the sovereign-debt crisis in Europe threatened to derail the global economic recovery. The index has jumped 56 percent from a 12-year low in 2009 as the Fed kept its benchmark interest rate at a record low near zero to foster growth. “The volatility daily is, even for a veteran like me, unnerving, unsettling, as it implies instability,” said Ralph Shive , manager of the $1.5 billion Wasatch-1st Source Income Equity Fund. “Is there really a mechanism for investing or is it just a casino every day?” The early rally in stocks came undone today as BP’s shares extended declines and the Fed’s Beige Book said economic growth was “modest” in many districts. “Economic activity continued to improve since the last report across all 12 Federal Reserve Districts, although many Districts described the pace of growth as ‘modest,’” the Beige Book, which is published two weeks before the Federal Open Market Committee meets to set monetary policy, said. Bankruptcy BP’s U.S. shares fell 16 percent to $29.20. Forty-three House members called today for the company to suspend its dividend, stop its advertising and spend the money instead cleaning up its oil spill in the Gulf of Mexico. There is a 50 percent chance BP won’t make its next quarterly dividend payment, Societe Generale analyst Evgeny Solovyov said in a research note. Because BP is likely to end up in bankruptcy, the Obama administration should consider placing the company in receivership to preserve company assets, said Representative Steve Cohen , a Tennessee Democrat. The cost to protect BP bonds against default soared more than nine times the level before the April 20 explosion. Credit- default swaps climbed 126.8 basis points to 387.6 basis points, according to CMA DataVision prices. BP’s shares have tumbled 52 percent since April 20. Anadarko, Transocean A gauge of energy companies fell 1.3 percent, the most of 10 industry groups in the S&P 500, after earlier gaining as much as 2.2 percent. Anadarko sank 19 percent to $34.83 for the steepest loss in the S&P 500. The shares have tumbled 53 percent since the April 20 explosion. Transocean Ltd. dropped 8.1 percent to $42.58, the lowest since December 2008. Halliburton Co. fell 2 percent to $22.56. Exxon Mobil Corp. retreated 2 percent to $60.03. Crude jumped as much as 4.1 percent on the New York Mercantile Exchange before settling at $74.38 a barrel, up 3.3 percent. Inventories of crude oil fell 1.83 million barrels to 361.4 million in the week ended June 4, the Energy Department reported today. Supplies were forecast to decline by 900,000 barrels, based on the median estimate of 17 analysts in a Bloomberg News survey. A gauge of financial companies lost 1 percent. Bank of America, JPMorgan Chase & Co. and Wells Fargo & Co. may lead 20 publicly traded U.S. banks that charge off as much as $40.9 billion on home-equity investments this year, Fitch Ratings said. Cash Dividend Bank of America lost 2.1 percent to $15.01 for the biggest loss in the Dow average. JPMorgan declined 1.8 percent to 37.12. Wells Fargo dropped 2.6 percent to 27.03. Viacom Inc. Class B shares added 1.9 percent to $33.16 after the company said its board has approved a regular quarterly cash dividend of 15 cents a share, and authorized a resumption of the company’s stock purchase program, increasing funds available to purchase Class B common stock to $4 billion. Fitch revised its outlook on the real-estate investment trust industry to “stable” from “negative,” citing improved access to capital markets and a strengthening U.S. economy. Standard & Poor’s said conditions are improving for apartment REITs. AvalonBay Communities Inc. rose 2.5 percent to $97.09. The second-largest publicly traded apartment landlord boosted its second-quarter forecast for funds from operations to a range of $1.01 to $1.03 a share. Apartment Investment & Management Co. added 1.4 percent to $20.43. To contact the reporter on this story: Esme E. Deprez in New York at edeprez@bloomberg.net

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U.S. Stocks Decline as Energy Shares Tumble on BP Concern

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Computer Sciences, Lubrizol Swaps Jump on LBO Speculation: Credit Markets

by on March 22, 2010

By Shannon D. Harrington March 22 (Bloomberg) — Credit-default swaps tied to the debt of buyout candidates from Computer Sciences Corp. to Lubrizol Corp. are rising as private-equity firms Blackstone Group LP and KKR & Co. predict the pace of deals will accelerate. Contracts on Falls Church, Virginia-based Computer Sciences jumped by almost half last week and the volume of bids and offers doubled as Barclays Capital analysts listed the company among a group of potential buyout targets. Swaps on Lubrizol, the largest maker of lubricant additives, rose to the highest in eight months as Bank of America Corp. strategists included the company on a list of LBO candidates. “Private-equity shops do have quite a bit of money on the sidelines,” said Mikhail Foux , a New York-based credit strategist at Citigroup Inc. Some companies’ default swaps were “trading very tight,” he said. Firms led by Blackstone and KKR, the largest publicly traded private-equity companies, announced $87.6 billion in deals over the past 12 months, and are sitting on an estimated $503 billion in unspent money, according to data compiled by Bloomberg. Prospects for an LBO wave, following a record debt market rally last year, are prompting investors to revisit trades last used during the buyout boom that ended in 2007, when $1.74 trillion in new borrowings decimated credit ratings of acquisition targets. Private-equity firms historically borrowed two-thirds or more of the acquisition prices in their deals. Commercial Real Estate Credit swaps on Computer Sciences have jumped 21 basis points to 70 basis points since March 16, reaching the highest level in a year, according to CMA DataVision. Contracts on Wickliffe, Ohio-based Lubrizol have climbed 22 basis points to 75 during the same period, reaching the highest since July 14. Computer Sciences spokesman Chris Grandis and Lubrizol spokeswoman Julie Young declined to comment. Elsewhere in credit markets, top-rated bonds backed by commercial real estate loans and most protected from losses are rallying as investors snap up the safest debt amid climbing delinquencies. Yields on top-ranked securities backed by skyscraper, hotel and shopping-mall loans fell 0.31 percentage point to 3.5 percentage points more than benchmark swap rates last week, the lowest in six months, according to Barclays Capital. Build America Bonds About 53 percent of more than 150 residential mortgage-bond investors holding $1.7 trillion of the assets surveyed during the final three days of last week had less of the securities than found in benchmark indexes, according to JPMorgan Chase & Co. That was 7 percentage points less than in a survey a month earlier, as the Federal Reserve ends its unprecedented purchases of the debt, though up from 20 percent in July. The Chicago Transit Authority plans to sell $502.7 million of taxable Build America Bonds with maturities of as long as 30 years as soon as tomorrow, according to a person familiar with the offering. Proceeds will be used for transportation system capital improvements, said the person, who declined to be identified because terms aren’t set. Leveraged-loan new issuance has been “strong” during early 2010, “with volumes tracking more than double last year’s pace,” according to JPMorgan. Syndicated loans totaling $7.3 billion have closed this month, following $11.1 billion of issuance in all of February, the highest monthly total since July 2008, New York-based analysts led by Peter Acciavatti wrote in a March 19 report. The loan pipeline has climbed to 31 new issues for $11.8 billion, according to the report. Debt Costs Rise U.S. banks and their holding companies may see debt costs rise under a provision of Senator Christopher Dodd ’s financial reform legislation, according to Moody’s Investor Service. “We would expect fixed-income investors’ concerns regarding potential losses under the new resolution powers to trump any comfort from improved stand-alone financial strength,” analysts led by Sean Jones wrote in a note today. “This could make wholesale funding more difficult and expensive to obtain for U.S. bank holding companies and banks.” Dodd, Democrat of Connecticut, is proposing that taxpayer money not be used to bail out a financial firm that enters receivership and that unsecured creditors take the first losses. A benchmark indicator of U.S. corporate credit risk rose as banks, hedge funds and other money managers started moving trades into a new series of the index. Markit CDX Index Series 14 of the Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt, was trading at 90 basis points as of 3:46 p.m. in New York, 5 basis points wider than Series 13, according to broker Phoenix Partners Group. New versions of the index are created every six months to replace companies that are no longer investment grade, aren’t among the most actively traded in the $25 trillion credit swaps market or fail to meet other index criteria. A new version of the Markit iTraxx Europe index, linked to 125 companies with investment-grade ratings, traded at 82.4 basis points, 3.25 higher than the old index, CMA prices show. German lawmakers dashed Greek hopes for the European Union summit this week in Brussels to result in a rescue plan. German leader Angela Merkel said EU leaders must not create “illusions” for markets by building expectations for Greek aid. Greece is struggling to contain a budget deficit that is more than four times the EU limit of 3 percent of gross domestic product. Swaps on Greece jumped 11.5 basis points to 341.5, the highest since Feb. 26, according to CMA. Blackstone, KKR Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting $10 million of debt. A rise indicates deterioration in the perception of credit quality; a decline, the opposite. Blackstone and KKR, both of New York, have told investors they see a pick-up in the pace of buyouts. Between the second quarter and the fourth quarter of last year, the value of deals doubled to $31.9 billion. Still, deals announced in the past three months, at $23.9 billion, remain below the $25.3 billion in the same period a year earlier, data compiled by Bloomberg show. Strategists at Bank of America, Barclays and Citigroup last week advised investors seeking to hedge against or profit from LBOs to either buy credit swaps outright on companies that may become targets or employ arbitrage trades in conjunction with other swaps that can often fund the cost of premiums. Credit Steepeners That includes so-called credit steepeners in which investors may buy protection on a company for seven years or more and then sell protection for five years or less, betting that the gap between the two will widen. “Credit curves generally steepen after an LBO because short-dated debt is taken out and significant longer-term debt is issued,” Barclays Capital strategists led by Ashish Shah in New York wrote in a March 19 note to investors. Analysts including Foux, part of a team that recommended investors buy protection on Computer Sciences in February, are cautioning investors that speculation on buyouts may be premature and that the volume or size of deals will come nowhere close to the three years before August 2007, when credit markets seized up and sent debt prices tumbling. The volume of credit swap quotes on Computer Sciences jumped 96 percent last week, according to CMA DataVision. High-yield, high-risk debt returned a record 57.5 percent in 2009, and another 4.3 percent this year, according to Bank of America Merrill Lynch index data. Speculative-grade debt is rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s. Companies raised more than $1.45 trillion of leveraged loans in the two years before August 2007 and deals reached as large as the $43 billion that KKR, TPG Inc. and Goldman Sachs Group Inc. paid for the Texas power utility Energy Future Holdings Corp., then known as TXU Corp. “By no means are we going back to 2007,” Foux said. “If deals are done, they will be relatively small deals, at least initially.” To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

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Computer Sciences, Lubrizol Swaps Jump on LBO Speculation: Credit Markets

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`On the Edge’ Banks Facing Writedowns After FDIC Auctions of Seized Loans

March 8, 2010

By James Sterngold March 8 (Bloomberg) — A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide. Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices . The auctions may have wider repercussions. Of the $50.4 billion in loans seized from failed banks currently held by the FDIC, 63 percent involve participations by other lenders, according to data provided by agency spokesman Greg Hernandez . “These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, who represents 25 lenders that took part in financing the W Hotel . “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.” Bank Failures A total of 140 banks failed last year, and FDIC Chairman Sheila Bair said the number may be higher this year. It stands at 26 as of March 6. The agency said on Feb. 23 that 702 banks were on its “problem” list as of Dec. 31, up from 552 at the end of the third quarter. The FDIC’s insurance fund had a deficit of $20.9 billion at the end of the year. “This whole thing is a mess waiting to happen across the country,” said Geoffrey Miller , a professor of securities law at New York University and director of the Center for the Study of Central Banks and Financial Institutions. “Unlike the subprime mortgage problems, which hit mostly bigger financial institutions, the commercial real estate crisis is going to hit mostly smaller and regional banks,” Miller said. “It was common for them to make these loans and buy participations. It’s a systemic problem that the FDIC has to deal with.” That view was echoed by John J. Collins, president of Community Bankers of Washington in Lakewood, Washington. Some banks in his state have expressed concern that they may have to take writedowns as a result of the FDIC sale of seized loans in which they participated, he said. “We have a number of banks teetering on the edge, and we don’t need this problem,” Collins said in an interview. ‘Maximize’ Recovery The FDIC is “required by statute to maximize its recovery on receivership assets,” Hernandez, the agency spokesman, said in an e-mail. “This is achieved through a broad, competitive bid process.” A $416 million package of Silverton assets being auctioned for the FDIC by Deutsche Bank AG includes $254 million of loans for commercial real estate projects such as the W Hotel in which the bank sold participations, according to Deutsche Bank’s announcement of the sale. They range from providing $752,000 in financing for convenience stores in Los Angeles to $46 million for a Le Meridien Hotel in Philadelphia. Bids are due April 12. The FDIC will entertain offers for individual loans or the entire Silverton portfolio, retaining a 60 percent interest to benefit from future profits, Hernandez said. The agency is separately auctioning $610.5 million of overdue loans seized from failed U.S. lenders, including $85.3 million in Silverton assets and $220.2 million issued by New Frontier Bank in Greeley, Colorado. That sale is being handled by New York-based Mission Capital Advisors LLC. The deadline for bids is April 6. W Hotel The loan for construction of the W Hotel in downtown Atlanta was made in April 2008, a month after the collapse of Bear Stearns Cos., according to Reynolds. The developer of the property is Atlanta-based Barry Real Estate Cos. , which owns commercial projects in Atlanta, Dallas, Orlando, Florida and Birmingham, Alabama. The hotel, managed by Starwood Hotels & Resorts Worldwide Inc. , opened in January 2009. It offers amenities such as a Bliss Spa and a service for obtaining skybox seats at Atlanta Braves baseball games. Silverton’s Specialty Finance Group LLC, which made the loan, notified the developer that it was in default, according to a letter dated April 16. The hotel is operating at “close to 60 percent” occupancy, said Hal Barry, chairman of Barry Real Estate. The occupancy rate for luxury hotels nationwide in the fourth quarter of last year was 60.6 percent, according to Smith Travel Research Inc. in Hendersonville, Tennessee. There are also 76 condominiums in the complex, of which one has sold, he said. He declined to comment about the status of the loan. Servicing Rights A sale of Silverton’s $23 million share of the financing at half its book value could force participating banks to take more than $30 million in writedowns, Reynolds said. The sale of loans from failed banks in 2009 brought on average 43 percent of their book value, according to an FDIC summary. Non-performing loans, those on which the borrower has defaulted or there is little prospect of repayment, were sold for 26 percent of their book value on average. Reynolds has proposed that the FDIC sell Silverton’s interest in the project separately from its lead role in servicing the loan. That would enable the participating banks to buy the servicing rights and seek a long-term workout, avoiding any immediate writedowns. Selling the servicing rights along with Silverton’s portion of the loan, which give the owner the ability to restructure or foreclose on a loan, could encourage short-term investors, Reynolds said. ‘Decreases’ Value If the loan is sold to a buyer who restructures it at less than book value or forecloses on the property, participating banks would have to write down their stakes, said Russell Mallett, a partner at PricewaterhouseCoopers LLP in New York who specializes in bank accounting. Absent a restructuring, banks have flexibility in how they value loans, he said. “This is not a perfect real estate development, but it could work its way out of its problems if they get more funding and we’re patient,” said Ralph Banks, executive vice president of Merchants & Farmers Bank of Greene County in Eutaw, Alabama, which owns less than $1 million of the loan. That view was supported by executives at two other lenders that bought participations who asked not to be identified because their banks’ roles as owners of the W Hotel loan haven’t been disclosed. The FDIC has a policy of not splitting servicing rights from loan ownership because it “decreases the value of those assets,” said Hernandez, the agency spokesman. ‘Deal With Themselves’ Reynolds said the banks he represents may bid for Silverton’s share of the W Hotel loan if they can come up with the capital in order to stave off writedowns. Some of the lenders are already in financial trouble, he said, declining to identify them. One that participated in the loan, Florida Community Bank in Immokalee, Florida, failed on Jan. 29. Silverton, a wholesale bank based in Atlanta with no consumer operations, was owned and overseen by more than 400 community lenders in the region. It was founded in 1986 and provided banking services, including wire-transfer systems, bond trading and credit-card operations, to about 1,400 institutions in 44 states. Reynolds said the banks that owned Silverton, some of which had representatives on its board, never imagined it would fail. “My clients had a long, successful record with Silverton,” Reynolds said. “When they signed their participations, they felt they were signing a deal with themselves because they all owned the bank. We all thought this was a way to diversify risk.” Silverton Failure The bank’s troubles began in early 2007, when it changed from a state to a national charter so it could accelerate its growth, according to a report by the Treasury Department’s Office of Inspector General, which reviews failures of banks regulated by the Office of the Comptroller of the Currency. Silverton’s commercial real estate lending rose to $1.2 billion at the end of 2008 from $681 million at the end of 2006, the report said. The bank had $4.1 billion in assets when it failed last year, and the FDIC said the closing will cost its insurance fund $1.3 billion. “The board and management either chose to ignore or failed to acknowledge the indicators of a declining real estate market,” the inspector general’s report said. Defaults Double Real estate loans at U.S. banks that are at least 90 days overdue or that are expected to default almost doubled in 12 months to 7.1 percent, according to December FDIC data . Non- performing loans for construction and development rose to 16 percent from 8.6 percent. “This is a situation the FDIC is going to face more, since the number of bank failures is going up,” said Gerard Cassidy , an analyst at RBC Capital Markets in Portland, Maine. “The FDIC is not in the business of managing loans, so they do have to sell them. But they also have to look at the bigger picture and take a global approach by liquidating those assets without hurting the banks that bought participations.” To contact the reporter on this story: James Sterngold in New York at jsterngold2@bloomberg.net

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Homebuilder Buys $3B in Troubled Real Estate Loans from FDIC

February 14, 2010

combined unpaid balance of $3.05 billion. Lennar paid $243 million for the portfolios, which include 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships. But the Miami-based builder says it’s no stranger to

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Homebuilder Buys $3B in Troubled Loans from FDIC

February 12, 2010

combined unpaid balance of $3.05 billion. Lennar paid $243 million for the portfolios, which include 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships. But the Miami-based builder says it’s no stranger to

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Lennar Completes Transactions With the Fdic to Acquire Approximately $3.05 Billion of Real Estate Loans

February 12, 2010

providing $627 million of non-recourse financing at 0% interest for 7 years. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships. Stuart Miller, President and Chief

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Lennar Pays $243M for $3B of Distressed Commercial and Residential …

February 11, 2010

The portfolios include about 5500 distressed residential and commercial real estate loans from 22 failed bank receiverships. Under terms of the deal, Lennar acquired indirectly 40% managing member interests in the limited liability …

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Shopping Center Receiverships and Foreclosures Usher In New Year

January 6, 2010

The retail real estate industry was jarred over the recent string of receivership and foreclosure news involving major shopping centers — which was unsettling at a time when the industry was hoping for positive news on consumer spending during the recent…

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Simon Halabi Loses Control of Seven London Office Towers Following Default

September 25, 2009

By Chris Bourke Sept. 25 (Bloomberg) — Real estate investor Simon Halabi lost control of seven London office buildings after defaulting on 1.15 billion pounds ($1.84 billion) of bonds tied to the properties. CB Richard Ellis Group Inc., the manager of the bonds, has appointed Ernst & Young LLP as receiver for the properties, according to a statement today from CBRE Loan Servicing Ltd. The receiver will collect the rent from the buildings and seek to preempt an order by the U.K. government to seize the properties for unpaid taxes, according to people familiar with the matter. Companies controlled by Halabi borrowed 1.45 billion pounds against nine properties in 2006 when they were valued at 1.83 billion pounds. About 1.15 billion pounds of the debt was packaged into bonds. In June, the offices were valued at 929 million pounds, according to an estimate commissioned by former loan servicer Hatfield Philips. The receivers “will act to secure rental income in the interests of lenders,” CBRE said in the statement. CBRE hasn’t instructed anyone to sell the properties, the company said. The buildings put into receivership are: JPMorgan Chase & Co.’s offices at 60 Victoria Embankment; Aviva Tower; Millennium Bridge House; New Court, Carey Street; Ludgate House; Sampson House and Leadenhall Court, according to the statement. Taxes Owed Halabi, 51, didn’t return a call for comment left at Buckingham Securities Holdings, his property advisory company, which is in the process of being liquidated. Kamlesh Bathia, his spokesman, didn’t respond to an e-mail seeking comment. Philip Cropper , head of CB Richard Ellis’s corporate finance division, and Vicky Conybeer , a spokeswoman for Ernst & Young, declined to comment. CB Richard Ellis is allowed to appoint a receiver over any of the borrower’s assets, according to the bonds’ 2006 prospectus. The buildings being put into receivership are those that owe taxes, the people said, who declined to be identified. Two other buildings backing the bonds weren’t assigned receivers. Earlier this month, the U.K. government said Halabi’s companies owed 4.77 million pounds in taxes on the London office buildings. Default White Tower 2006-3 Plc issued the bonds. In June, the deal became the largest single borrower commercial mortgage-backed securities to default in the U.K. Debt agreements were breached after the nine buildings lost half their value. Syrian-born Halabi started as a director of the real-estate investment company Property Trust in the 1980s and is a billionaire, according to Forbes magazine . He was among investors who benefited from the property boom that was fueled by the growth of securitization. Halabi’s assets include the Naval and Military Club on London’s Piccadilly and Mentmore Towers, the former home of Baron Mayer de Rothschild in Buckinghamshire, England. He was one of the original backers of the planned London skyscraper called the Shard before selling his stake last year. To contact the reporter on this story: Chris Bourke in London at cbourke4@bloomberg.net .

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Industry Faces Shortage of Receivers

September 21, 2009

NEWPORT BEACH, CA-The real estate industry faces a shortage of adequately experienced turn-around executives and receivers to cope with the tremendous number of anticipated defaults, a veteran real estate receiver says. Taylor B. , who

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Oaktree Capital May Merge Its Japan REIT, Buy Distressed Australian Assets

September 1, 2009

By Netty Ismail Sept. 2 (Bloomberg) — Oaktree Capital Management LLC , a private-equity fund with about $61 billion of assets, is seeking to merge its Japan property trust and buy buildings in Australia as a credit shortage makes distressed investments attractive. Oaktree is exploring merger opportunities for its Tokyo- based Japan Rental Housing Investments Inc. with other Japanese real estate investment trusts, said Robert Zulkoski , head of the special situations and real estate team in Asia. Oaktree “stands ready” to complete a proposal to merge Japan Rental Housing with New City Residence Investment Corp., the nation’s first failed REIT, should New City creditors reject a revised receivership plan from Lone Star Funds this month, he said. “We’re more than happy to engage with New City Residence’s creditors if they choose,” Singapore-based Zulkoski, 48, said in an interview yesterday. “We’ve always shown flexibility in terms of paying down New City Residence’s debt and fairly rescheduling the balance of the debt.” Private-equity funds are looking to buy distressed real- estate assets as cash-strapped property firms and other investors, including investment banks, sell at discounts. Fund managers and investors were seeking $92.5 billion for funds to buy properties and debt being sold by developers struggling to repay bank loans or finance construction amid the credit crisis, London-based Preqin Ltd. said in February. ‘Meat and Potatoes’ “Real estate is going to be the meat and potatoes of the distressed business,” said Michel Lowy, the former head of Asia-Pacific Strategic Investment Group at Deutsche Bank AG, who is setting up a Hong Kong-based distressed investment business. “What makes it so very interesting as an asset class is that there’s always a lot of leverage in real estate, especially for more mature markets like Australia or Japan.” It is likely there will be mergers among Japan’s 41 REITs as early as this quarter, Zulkoski said. Nippon Residential Investment Corp. and Itochu Corp.’s Advance Residence Investment Corp. announced the first merger of two Japanese REITs in August. Japanese REITs tumbled in value as subprime mortgages defaulted in the U.S., sending the global economy into a recession and choking off credit. The Tokyo Stock Exchange REIT Index is 61 percent below its May 2007 peak. Los Angeles-based Oaktree will provide additional financial assistance to Japan Rental Housing, previously known as Re-Plus Residential Investment Inc., if it acquires another REIT, Zulkoski said. “Even before the financial crisis, it was evident that there needed to be consolidation within the J-REIT sector,” Zulkoski said. “We and others who are looking to be catalysts for this are working very hard with relevant government agencies to make it happen.” New City New City in October became the first listed Japanese REIT to file for bankruptcy protection with 112.4 billion yen ($1.2 billion) of debt. Creditors are scheduled to consider a revised offer from Dallas-based Lone Star, the court-appointed receiver, by Sept. 9 after an initial plan was rejected in July. Lone Star beat Oaktree and other investors in the bidding contest for the property trust in April. Oaktree may face competition for the assets. Daiwa House Industry Co., Japan’s largest homebuilder by sales, said in August it’s gaining creditor support for a rehabilitation plan for New City over a rival bid from Lone Star. Daiwa House will seek receivership of New City if the Lone Star offer is rejected. A large portion of the “several hundred billion dollars” of loans to Japan’s real estate industry over the last five years will have difficulty being refinanced, Zulkoski said. Oaktree plans to buy the non-performing loans and work with borrowers or buy properties that back the debt as the loans come due for refinancing in the next few years, he said. “There is a ton of opportunities in real estate in all its forms: whether direct listed, mezzanine finance, REITs, public equities or private equity,” Lowy said. Australia Oaktree is looking to buy distressed real-estate assets in Australia, China and South Korea. The team has made more than $4 billion of Asian real estate related investments and targets an internal rate of return of at least 20 percent. Oaktree bought Singapore-based Pangaea Capital Management LP, founded by Zulkoski, to expand investments in Asian real estate two years ago. Zulkoski previously oversaw the expansion of Colony Capital LLC’s Asian investment business from 1998 till 2004. Oaktree is set to acquire buildings in Sydney and other major Australian cities by the end of the year, he said, without giving details. It also is seeking investments in the securitized debt market and property trusts, Zulkoski said. Writedowns The 16 members of the S&P/ASX 200 A-REIT Index reported combined losses of A$19.5 billion ($16.1 billion) and writedowns of A$21.7 billion in the year to June 30, according to data compiled by Bloomberg. Oaktree plans to restructure some of the financing provided by investment and commercial banks to Chinese developers whose initial public offerings were scuttled by the financial crisis. The private-equity fund expects in the coming months to conclude new transactions in South Korea, where it has made an investment every year since 1999. To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net

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