As the largest borrower in European real estate last year – closing $20 billion of debt deals – Blackstone has been noted for negotiating loan structures that do not feature default covenants.
During an on-stage interview at the Loan Markets Association’s Real Estate Finance Conference in London in May, Gadi Jay, who sources loans for the private equity giant’s real estate team, argued Blackstone requires “robust” capital structures to allow it to implement complex value-add business plans.
“We don’t want to be in a position where we are forced into a fire sale or to take action that is counter-intuitive to our business plan,” Jay said.
A glimpse into Blackstone’s deal structures was offered by last November’s £347.9 million (€389.3 million) securitisation by Bank of America Merrill Lynch of debt related to a portfolio of UK ‘last-mile’ logistics, notable for its lack of financial default covenants.
However, Jay argued that Blackstone’s borrowings do include features such as cash traps to ensure loans continue to be serviced. “On a transaction where income is being produced, we’re comfortable to ensure that if there’s a slight downturn for the asset, we lock up capital within the structure, rather than distribute to the equity, so there is an alignment of interest with the lender.”
Blackstone does agree dividend blocks as well as ‘soft’ loan-to-value and debt-yield covenants, where cash is accrued in the structure to be spent on the investment or blocked until performance improves, Jay explained, adding: “We look to avoid the hard covenants that would allow a lender to take the key if something goes wrong. It’s about us saying we will be good custodians of your capital, but you have to allow us to manage through potential issues with the loan.”
Covenant packages must account for the fact Blackstone’s borrowings are large-scale and can be syndicated to a wide array of lenders, Jay continued: “It is difficult to assume one could negotiate with a disparate group of syndicate lenders in a multi-billion-euro transaction a mutually acceptable solution that is in the best interest of the asset and all parties equally. As a result, we look to ensure there is an alignment of interest and therefore agree dividend blocks, but remove default covenants from transactions that could give rise to those challenges. Financiers are comfortable with our stewardship and that is a key determinant of how we approach our transactions.”
As a key sponsor of recent CMBS deals, Jay said Blackstone would continue to support the revival of securitisation, adding the market needs to become more efficient to become a financing option for borrowers.
“The CMBS market is somewhat receptive to new transactions, but is dependent on asset class and may be less efficient for fully transitional transactions. The time it takes to bring a deal to market currently makes it difficult to underwrite deals exclusively for a CMBS exit. If the market becomes more efficient it can be an avenue to liquidity.”