Yeah this was a high-flying deal back in the day…
The Blackstone Group has reached a deal to reorganize the big debt load of Hilton Hotels, shoring up the finances of one of its crown jewels, a person briefed on the matter said Friday night.
The deal, which would cut Hilton’s debt burden to about $16 billion from $20 billion, would help bolster the hotel operator at a time when the travel industry is suffering from fewer customers.
So a $4bn reduction in debt… but how? Let’s read on:
Under the terms of the agreement, Blackstone will inject an additional $800 million of capital to buy back Hilton’s debt at a discount, this person said. The maturities of some of Hilton’s debt will also be pushed back.
$800 million in capital to buy Hilton debt, but we don’t know how much. If they plowed that $800 million into the entire $4bn takeout of that debt, that implies a bid of 0.20. I’m pretty sure that the gang at Blackstone wouldn’t plow all their capital into the business that way, especially if they can get someone else to pay for it.
But the company does have a lot of debt to pay off. From Reuters:
The $26 billion deal to buy Hilton was struck at the peak of the buyout bubble in July 2007 and was financed with $20.6 billion of debt and about $5.7 billion of equity.
So only $600 million has been paid off. Fantastic. <sarcasm off>
And they extended the term on some of the other debt? They’re just hoping to buy some time so the RevPAR on the properties comes back. Because as the RevPAR comes back, so does the cash flow. Right now, I’m pretty sure most of those properties are not cash flowing the way they were expected to at the time the deal was underwritten in ’07. But if they still have sufficient debt service coverage now, extending the term may not be that big of a deal.
But with the problems cropping up in CRE, I wouldn’t be so sure. And with so much in CMBS set to roll in ’11, that’s a sector that could get real ugly real quick.
Yes, consider this a warning to hit the exit on your REITs…
Disclosure: I have no position in RWR or BX.