Hilton Debt Load Weighs on Blackstone By Lingling Wei and Peter Lattman Wall Street Journal 10-28-2009

Hilton Debt Load Weighs on Blackstone
Buyout Firm in Talks With Lenders to Slice $5 Billion Off Loans in Bid to Shore Up Hotel Chain
By Lingling Wei and Peter Lattman
The Wall Street Journal
October 28, 2009

Blackstone Group LP has begun talks with lenders to cut up to $5 billion from the $20 billion debt load carried by Hilton Worldwide, as the private-equity firm seeks to protect its single biggest investment, according to people familiar with the matter.

The talks are part of a restructuring of corporate debt under way across the economy. Companies hold roughly $1 trillion of senior loans and high-yield bonds that mature before 2015, much of it issued in leveraged buyouts from the middle of the decade. Many of those deals were struck at sky-high valuations, and now owners are trying to fix balance sheets to stave off default.

The talks also are another sign of the turmoil in the commercial real-estate industry. Delinquencies on commercial mortgages held by banks more than doubled to 4.7% in the third quarter, according to Foresight Analytics.

In the Hilton negotiations, Blackstone is considering contributing $800 million of new equity to buy back debt at a discount. It also is seeking to extend debt maturing in 2013 to 2016, while converting some junior slices of debt into equity. The $800 million in additional equity would come from funds managed by Blackstone that already have invested in the deal, the biggest equity investment ever made by the 24-year-old firm founded by Stephen Schwarzman and Peter G. Peterson.

Blackstone funds and co-investors originally put up $5.6 billion in equity in the deal, while assuming $20 billion in debt. Because the talks are in the preliminary stage, the people cautioned, it is unclear what the outcome will be. But Blackstone hopes the debt load will be cut by one-fourth, or $5 billion.

A number of issues are complicating the discussions. Roughly $4 billion of Hilton debt is held by the Federal Reserve, which assumed the position from Bear Stearns Cos. as part of a sale of the investment bank to J.P. Morgan Chase & Co. Also, the terms of the debt limit Blackstone's ability to repurchase Hilton debt.

Many debt workouts require borrowers to seek consent from scores of lenders, who bought the debt after it was securitized into bonds. The Hilton situation is different because banks hold nearly all of the debt, an unintended result of the closure of securitization markets soon after the Hilton deal was announced.

A Blackstone spokeswoman declined to comment.

It isn't clear how active the Fed, which is being advised by BlackRock Inc., will be in the talks. A Fed spokeswoman declined to comment.

With the capital markets opening over the past six months, large private-equity firms are using a variety of financial maneuvers, including exchange offers, open-market debt repurchases and tender offers, to push off any financial pain. Kohlberg Kravis Roberts & Co., the most-active investor during the boom, has refinanced and extended the maturities on more than $13 billion of debt at eight of its portfolio companies, including hospital chain HCA Inc. and retailer Toys "R" Us Inc., according to the firm.

In Blackstone's case, President Tony James said on a recent earnings call that "you can effectively rewrite history by changing a company's capital structure and reducing its leverage."

But Blackstone can't rewrite its acquisition of Hilton, a storied hotel chain founded by Conrad Hilton in 1919, which owns or manages 2,900 hotels with some 490,000 rooms throughout the world.

At the time, it was lauded as a coup for Blackstone as it was able to line up $20 billion in financing from a group of seven banks, including Bear Stearns Cos., Bank of America Corp., Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Lehman Brothers Holdings Inc. General Electric Co.'s finance arm, GE Capital, wound up buying a $2 billion piece of the senior debt, according to people familiar with the matter.

Representatives at the banks and GE declined to comment.

But the downturn in the hotel market, triggered by reduced business and leisure travel, has sent values tumbling and turned the deal into a burden.

The firm already has written down the value of its investment by two-thirds, a paper loss of about $3.7 billion on the investment.

Hilton has been hit with some bad news since it was acquired by Blackstone. Federal prosecutors are investigating whether the chain and several of its former executives should face charges for allegedly stealing confidential documents from rival Starwood Hotels & Resorts, according to people familiar with the matter.

The Hilton deal also has figured prominently in the insider-trading scandal that erupted this month, with prosecutors alleging Galleon Group used nonpublic information on the Blackstone buyout. Blackstone executives haven't been implicated in either of the investigations.

Blackstone has good reason to be nervous about Hilton. Since its acquisition of the chain, the global hotel market has gone into a downturn worse than any since the Great Depression.

Occupancy at U.S. hotels and average revenue per available room have suffered their worst declines in a one-year period since Smith Travel Research began tracking hotel-industry figures in 1987.