Brookfield Asset Management, Benson Elliot and i-Star Financial are expected to be among bidders to submit offers at the end of March for Blackstone’s insolvent Deutsche Interhotel (DIH) group, the 10-strong hotel portfolio in Eastern Germany which is expected to sell for around €500m.
The three anticipated bidders were part of the original syndication of the mezzanine component of the €550m whole loan underwritten by Merrill Lynch in early 2007 to finance Blackstone’s top-of-the-market €720m price for the 10 hotels in the former East Germany.
Brookfield, Benson Elliot and i-Star are expected to be joined in a protracted sales process, set to last several months, by additional private equity funds – which have indicated expressions of interest already – and, possibly, sovereign wealth funds, although such investor interest is yet to manifest.
While the original motive for Brookfield, Benson Elliot and i-Star’s investment in the mezzanine ticket was as part of a subordinated debt investment strategy, the three potential equity competitors are now expected to capitalise on their natural advantage as part of the existing capital stack and seek to migrate their junior debt into equity while limiting the potential loss on their original commitment.
DIH is expected to sell for between €475m and €525m, depending on the eventual level of competition, which would see the hotel company trade for below the circa €550m outstanding debt balance representing a rare equity loss for Blackstone, at near €170m, which crystallised after the hotel company fell into insolvency last November.
While Blackstone appointed Goldman Sachs and Christie & Co to advise DIH last November, the private equity firm’s role in the transaction is now just notional.
The 10-strong DIH hotel portfolio comprises Berlin’s Park Inn and Grand Hotel, the Westin Bellevue, Ibis and Mercure hotels in Dresden, a Westin and Radisson hotel in Leipzig, a Radisson in Erfurt, two Mercure hotels in Potzdam and Chemnitz.
Blackstone bought the hotel portfolio in December 2006 from a Deutsche Bank and Aareal Bank-led syndicate which took ownership after previous DIH owner, Klingbeil Group, defaulted on its debt.
The business plan for Blackstone with the 10 hotels – which prior to Klingbeil’s ownership was under the control of the Stasi, the former East Germany’s secret service – was to improve on the existing underperformance of the hotel company, selling some of the smaller hotels, and benefiting from an expected narrowing economic gap between the former East and West Germany.
A wider pan-European hotel IPO had even been mooted by Blackstone as a potential exit strategy at the time of its purchase.
However, the global financial crisis put paid to Blackstone’s original ambitions for DIH as well as Merrill’s securitisation exit strategy for the senior portion of the €550m whole loan. Instead, Merrill syndicated the senior debt to a few German banks, including Munich Hyp, and sold the junior debt to Brookfield, Benson Elliot and i-Star.
In the first half of 2009, Lone Star acquired Merrill’s unsyndicated component of the original senior loan at a discount as part of a wider loan portfolio trade, which subsequently traded to Starwood Capital at the end of last year, again at a discount to its then par value.
With Lone Star and Merrill now out of the transaction, and with Blackstone having already walked away, Starwood is expected to be competing for a slice of the refinancing among a surprisingly large contingent of interested senior and mezzanine lenders keen to be involved in the fresh acquisition finance.
i-Star Financial was founded by Starwood Capital in 1993 as a senior and subordinated debt investor and is now a US REIT with a direct portfolio as well. It is likely to bid on converting its partially out-of-the-money mezzanine position in the legacy DIH debt stack against Brookfield and Benson Elliot.
Goldman Sachs’ role in advising DIH during the process of selling the insolvent company puts the investment bank in a strategically useful position should it seek to be part of any eventual acquisition financing ticket.
Already, several fresh capital stack permutations have been mooted, varying between €250m and €300m for the senior and between €100m and €150m in mezzanine debt, with senior margins around 350 basis points over EURIBOR and mezzanine at between 9% and 11% is thought plausible.
However, eventual margins will be relative to the final size of the capital stack and the LTV, with the usual premium for hotel financing and some of the individual assets’ underperformance partially offset by the financing competition expected.
Klingbeil Group acquired the hotel portfolio from the unified German government in 1991, financed by Deutsche Bank, which syndicated around 53% of the senior debt, 33% of which went to Aareal Bank and the balance was sold to Deutsche Bank’s private clients.
Last month, Starwood Capital bought Principal Hayley’s 23-strong UK and European hotel chain for £360m, financed with a three-year £200m Citigroup senior loan which it plans to syndicate.
Earlier in February, Abu Dhabi Investment Authority bought 42 Marriott hotels from the Royal Bank of Scotland Group for around £640m, after a £749m bid by Blue Coast Hotels, the Indian hotel operator, collapsed in May last year.
All parties declined to comment.