Hilton to start marketing largest post-crisis CMBS

Thu Nov 14, 2013 3:36pm EST

NEW YORK, Nov 14 (IFR) - CMBS investors were expecting Hilton Worldwide to begin marketing a US$3.5bn CMBS via five investment banks on Thursday, representing the largest commercial-mortgage bond offering since the financial crisis, according to buy-side sources.

The CMBS is a key part of a diverse US$13.425bn debt-financing package of the hotel chain, sponsored by Blackstone, as it sets the stage for an upcoming IPO. According to Reuters, the IPO is slated for the week of December 2.

The Blackstone Group acquired Hilton in October 2007 for US$26.3bn, taking it private.

JP Morgan is the structuring lead underwriter of the CMBS, while Deutsche Bank is a co-lead manager. Bank of America, Goldman Sachs and Morgan Stanley are co-managers and joint bookrunners.

In late September, Hilton priced a US$10.1bn bank-loan and high-yield bond package that met with very strong investor demand and was well oversubscribed.

Today's CMBS, which is expected to close by the end of next week, is the last component of the debt package, which was assembled to refinance Hilton's existing debt.

Despite its size, the deal is expected to be absorbed fairly easily into the CMBS market, which is slated to hit a post-crisis volume record this year of close to US$80bn.

"It appears that the arrangers have found a reasonable window of opportunity here now that rate volatility has eroded from earlier in the year, and Fed tapering should be deferred," said Christopher Sullivan, chief investment officer of the United Nations Federal Credit Union.

Moreover, "investor interest in rather traditional, transparent CMBS structures supported by quality loans and offered at competitive spread to other credit classes has not diminished," Sullivan added.

Blackstone originally intended to finance its LBO of Hilton through CMBS in 2008 via a US$8.4bn deal, but the offering fell apart when lead manager Bear Stearns went under and was acquired by JP Morgan in March of that year.

The original 2008 offering was viewed by many on the buyside as risky, offbeat debt, as it contained a good portion of non-real estate collateral from the hotel chain, such as timeshare and franchise assets.

The CMBS is now being resurrected, albeit in a diminished, safer form. It will be backed by 23 "trophy" Hilton hotel properties, including properties in Hawaii, New York, and San Francisco, according to a pre-sale report from Morningstar. It will be a mix of fixed- and floating-rate debt, according to an investor update sent out yesterday by the lead-underwriting banks.

"The underwriting is fine, and overall the company is doing very well, but we actually preferred the existing [2008 CMBS] deal, where all the collateral was in one place, rather than the optimized capital structure with different bonds in all sorts of different markets," said a senior CMBS investor at one of the largest US asset managers.

Having all the collateral in one place in the first iteration of the Hilton CMBS allowed for a more efficient restructuring in 2010, the investor said, because there was only one set of creditors. Moreover, the borrower could not sell other assets, recoup equity, or move collateral around to protect itself, meaning creditors were able to preserve most of their value.

JP Morgan declined comment on the deal.

According to investors, the offering will be broken up into a US$875m floating-rate slice and a US$2.625bn fixed-rate slice. The floating-rate portion will have a two-year maturity and three one-year extension options, according to investors. The fixed-rate slice will have a five-year maturity.

The deal will have ratings from Moody's, S&P, and Morningstar, with the senior tranche receiving Triple A ratings.

"Although it is a sizeable single offering, the deal should be absorbable or distributed without too much difficulty, especially as it might have a somewhat broader appeal than the usual single-asset offering," UNFCU's Sullivan said.

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