Beacon Capital Closes on Loan Modification

Beacon Capital Closes on Loan Modification

By ELIOT BROWN

Boston-based Beacon Capital Partners has closed on a modification of a troubled $2.7 billion loan, which was one of the largest commercial-real-estate loans to ever be securitized, a company official confirmed Tuesday.

Beacon used the loan, which was carved up into commercial-mortgage-backed securities, to buy a 20-building office portfolio in Seattle and Washington, D.C., in 2007 near the top of the market.


CoStar Group

Earlier this year, Beacon reworked debt on Seattle's Columbia Center.
."We believe this is a good outcome for the bondholders and the equity," Beacon's president, Fred Seigel, said of the recent restructuring in a brief interview Tuesday.

The deal marks Beacon's second major debt restructuring this year. It follows Beacon's reworking of a $380 million securitized loan on a separate property in Seattle, the 76-story Columbia Center, for which Beacon received a three-year extension, with options for two more years.

While full details about the modifications weren't available, the restructurings appear to allow Beacon to escape the risk of CMBS investors foreclosing on its giant holdings, which hit trouble when higher rents failed to materialize amid the economic crisis.

The 20-building, 9.9-million-square-foot portfolio was acquired from the Blackstone Group in 2007. It had been owned by Equity Office Properties, a public company that Blackstone acquired that year.

The loan to finance the purchase was so large—second in the CMBS market only to the $3 billion first mortgage for the 2006 purchase of Stuyvesant Town and Peter Cooper Village in New York City—that it was spread out over seven batches of securities.

Failing to meet bullish assumptions made in 2007, the income on the properties was barely covering the mortgage payments, with a slim debt service coverage ratio of 1.08% at the end of last year, according to research firm Trepp.

Beacon sought to decrease those payments, stretching out the loan while cutting its interest rate.

An agreement reached on Dec. 3 calls for a five-year extension to 2017 on the interest-only loan, with the interest rate getting cut from 5.797% to 3%, according to ratings agency Standard and Poor's, which was informed about the deal. In addition, Beacon must put in $200 million in new collateral, according to S&P.

Such workouts have become customary in the CMBS market. Special servicers who oversee the multitude of troubled loans are beginning to process and return to normal many of the problematic loans made between 2005 and 2007. But more CMBS loans are running into trouble every week, bringing the delinquency rate to near record highs.

Investors in the $2.7 billion Beacon workout are likely to benefit differently from the modification, based on the risk level of the bonds they hold. Given that the extension chops the loan's overall interest rate, those holding the last-to-be-paid bonds are likely to see revenues dry up, as the newly lowered interest payments typically wouldn't cascade all the way to the lowest bondholders.

Write to Eliot Brown at eliot.brown@wsj.com