Morgan Stanley (NYSE:MS) owes its creditors about $2.4 billion in relationship to the Japanese Hotel chain they acquired, and the debt owed is due in April 2010. Citigroup (NYSE:C), along with Japan-based Shinsei Bank, are the largest lenders in the deal, making it uncertain whether Citigroup will be left holding their part of the debt at that time.
Easy access to loans between 2004 and 2007 pushed Japanese property prices up, and Morgan Stanley acquired the 13 hotels and two property management companies in Japan just before property values in the country started to plunge. All Nippon Airways was the former owner of the properties and companies called ANA which Morgan Stanley acquired.
Now that there is a significant discrepancy between value of the property and the loan, Citigroup and Shinsei Bank have been pressing the investment bank to put more cash into the properties to give the holdings a more solid financial foundation. Morgan Stanley, so far, has been unwilling to take that step.
As far as ongoing negotiations between Morgan Stanley and its creditors, the push to get them to put more capital into the venture has been somewhat soft, as Citigroup and the others are concerned Morgan will simply walk away and leave them holding the assets.
It’s doubtful Morgan Stanley would put more money into the deal, as it seems they’re hoping others will assume the debt on the hotels to take them off their hands.
How the deal was structured was Citigroup and Shinsei provided close to 180 billion yen in financing via senior debt to make it happen. GIC’s place in it was to provide mezzanine financing, which is combination of equity and debt. They are in a less senior position than Citigroup and Sensei, and after the loss of equity for Morgan Stanley, would be the next entity to lose their interests in the assets.
It seems this is what Morgan Stanley is counting on moving forward: a move by the sovereign wealth fund to protect their stake in the ANA hotels, which would take the the problem away from Morgan Stanley and place it on them and the other lenders.
This is a microcosm of what is set to happen across America and the world in the commercial loan sector, which is expected to experience a large number of defaults in the second half of 2010 especially.
In Japan alone expectations are there will be defaults up to 750 billion yen before the smoke clears, as a large number of loans from that period of time are due to mature this year. A total of 1.23 trillion yen is due in 2010.
The Real Estate Funds division of Morgan Stanley acquired ANA in June 2007.
