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* MSREF faces loan deadlines on two $1 bln-plus Tokyo bldgs
* Loans on Shinagawa Grand Central Tower due April 15-sources
* Debt on former Shinsei headquarters matures in July-sources
* Blackstone would get sales rights to one if default-sources
By Junko Fujita
TOKYO, Feb 16 (Reuters) - Morgan Stanley funds could lose the keys to two prime office buildings in Tokyo when the debt matures in the next few months, sources said, the latest fallout from a series of highly leveraged investments in the run-up to the financial crisis.
Morgan Stanley (MS.N) was one of the most aggressive investors in global property markets during a debt-fuelled boom that fizzled out in 2008. Japan was one target region for investments made through funds known as MSREF.
MSREF V, a $4.2 billion fund, faces an April 15 repayment deadline for loans on the 32-storey Shinagawa Grand Central Tower, which it bought for 140 billion yen ($1.67 billion) in 2004, two sources with direct knowledge of the transaction said.
Also, the $8.8 billion MSREF VI is confronting a decision on the former headquarters of Shinsei Bank (8303.T) when debts on that building -- bought in 2008 for 118 billion yen -- mature in July, three sources familiar with that deal told Reuters.
The value of the properties has fallen well below that of the debt, analysts and sources said, raising the prospect that the funds will fail to repay or refinance the loans and hand control of the buildings over to lenders.
Private equity firm Blackstone Group LP (BX.N) holds the most junior portion of the debt on the Shinagawa building and therefore would gain the right to market the building for seven months from April if MSREF V defaulted on the loans, sources said.
The sources spoke on condition of anonymity due to the sensitive nature of the matter. A Morgan Stanley spokeswoman in Tokyo declined to comment.
A default would not likely come as a major surprise to industry watchers. About a year ago, Moody’s Investors Service cut its ratings on securitised bonds which market experts say are backed by the Shinagawa tower.
The most senior debt, or class A debt, was cut by two notches to Aa2 (sf), class B debt was lowered by four notches to A3 (sf), and class C downgraded six notches to Baa3 (sf).
“We downgraded the bonds based on an assumption that the borrower may not be able to refinance the debt,” said Koji Kumamaru, an analyst at Moody‘s, which as a general policy does not identify the specific properties backing rated bonds.
Graphic on Japan's CMBS: r.reuters.com/qus97r
Graphic on GDP, land prices: link.reuters.com/zeb93p
Story on MSREF VI loan extension [ID:nTOE63M04H]
Deutsche Bank (DBKGn.DE) provided 92.7 billion yen in loans to MSREF VI for the Shinsei building, making it the main lender on that deal. Deutsche sold four-fifths of the debt onto other investors through commercial mortgage backed securities. (CMBS)
Defaulting would limit any potential further losses for the funds given the uncertain prospects for a recovery in property prices. CB Richard Ellis estimates both buildings are currently worth about 60 percent of their 2007 peak.
A similar drama played out last year when MSREF VI managed to hold on to 13 hotels bought for $2.4 billion from All Nippon Airways (9202.T) in 2007 after a temporary debt extension and ultimately a refinancing of the loans. [ID:nTOE697046]
The cases highlight the difficulties investors face in repaying highly leveraged real estate loans made in the years leading up to the financial crisis.
Banks aggressively extended loans during the boom, repackaging many of them into CMBS for sale to investors. Moody’s estimates some 670 billion yen worth of loans backing CMBS will become due this year after a record 1.1 trillion yen in 2010.
MSREF V took advantage of the run-up in property prices and in 2007 refinanced its debt on the Shinagawa property with new loans worth 278 billion yen, twice the value of its purchase and likely yielding a tidy profit for the fund, sources said.
The debt was repackaged into CMBS with six different tranches by Morgan Stanley and sold to investors, according to sources.
Deutsche Bank has been sounding out potential investors about their interest in either buying the former Shinsei headquarters or the loans, eyeing the risk of default, a source said.
Drumming up interest in the 20-storey building, located in central Tokyo near the government office district, has been complicated by the fact that Shinsei moved out in January and new tenants have not been found. ($1=83.76 Yen) (Editing by Edwina Gibbs and Nathan Layne)