In early March, alternative asset management company Blackstone (BX +4.41%) defaulted on a 531 euro ($579 million) bond backed by a portfolio of European offices. The default comes at an especially bad time for the company as March marked the fourth consecutive month that Blackstone limited withdrawal requests for its private real estate investment trust (REIT), known as BREIT.
Investors are rightfully wondering if this default is a sign that Blackstone is in trouble or if this top-tier stock can come out ahead. Let's take a closer look to see what this default could mean for the company.
NYSE: BX
Key Data Points
What's going on?
Blackstone is one of the largest alternative asset management companies in the world. At the end of 2022, the company managed more $975 billion for high-net-worth individuals and institutions. The company invests in non-traditional assets such as real estate, private equities, credit, life sciences, and renewable energy, along with several other specialized asset classes -- including this bond.
Blackstone took out a loan in 2017 to partially fund the investment in Sponda Oy, a Finnish company that owns a portfolio of offices in Finland and Europe. The loan was securitized a year later and sold to investors in the form of a bond. Blackstone had paid off a good portion of the original 531 euro debt (297 euros remained at year-end 2022) until the default.
The bond default wasn't totally unexpected. Macroeconomic pressures, including pandemic-related setbacks in the office-rental market, slowing real estate values due to rising interest rates in Europe, and the Ukraine conflict have hurt operations for office office space and in Finland in particular.
Blackstone contacted its servicing company, Mount Street, in mid-February to request an extension on the maturity as it worked on a plan for the underlying assets. The plan involved selling the assets over the next few months in addition to Blackstone paying a small fee if the extension were granted. But the servicing company denied the request. The bond is now in the hands of the servicing company's special servicing department, which is legally required to act on behalf of the bondholders to achieve maximum recoveries.
Specifics have not been shared about what this could mean for Blackstone or its underlying assets, but Blackstone has indicated it has "full confidence in the core Sponda portfolio and its management team."
So what?
The past year has been hard for Blackstone. Rising interest rates, weakening real estate values, fluctuating currency, and concerns about a potential recession have sent the stock sinking. As of this writing, the stock had fallen 36% during the past year and these pressures aren't likely to subside anytime soon.
However, Blackstone's default isn't necessarily a sign of bigger trouble ahead. Defaults such as this can be a way of hedging losses. Rather than paying the debt in full from its cash on hand, the company can liquidate the underlying assets through loss mitigation, receiving a portion of its investment back. In many cases, this offers a more advantageous return for the company despite being in default.
The company used this strategy in 2020 with a hotel property, and countless other publicly traded (REITs) have used this tactic when the underlying property produced less income or had less value than the debt owed. As of year-end 2022, Blackstone had $4.2 billion in cash and cash equivalents. So it's not a matter of not having the money; it's simply utilizing those funds for the highest and best use.
Of course, it would have been more advantageous for Blackstone to liquidate the assets via the extension, but at this point, Blackstone has to let the process play out and continue to find new strategic investments to generate a higher return for its clients. The company just entered into an agreement to acquire meeting software company Cvent and it closed a new private equity fund that will invest in the secondary markets. Clearly, new opportunities are abundant.
More favorable economic conditions would make Blackstone's job easier, but it's well positioned to overcome the current challenges including this default. The stock has far outperformed the broader S&P 500 over the last three, five, and 10-year periods and with high demand for alternative assets today, I believe it will continue to do so over the next 10 to 20 years.
