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Hedge Funds Fuel Bond Financing Deals
Borrowers turn to bond financ-
ing more often to close unique
commercial real estate deals.
Sometimes these deals don’t
even get to the offering stage,
as a hungry hedge fund recently
proved when it stepped in and
purchased the debt as unse-
cured notes for a hotel acquisi-
tion and repositioning deal.
The bond plays tend to be big,
usually larger than $100M,
but smaller deals are getting
done, too.
Hedge funds usually provide
equity, straight and preferred,
and mezzanine loans. Usually
these players want to be in and
out of a deal in a year or two.
Look for these players to also
have an appetite for distressed
debt, or debt on the verge of
becoming distressed and shops
for a buyer to take it off the
lender’s balance sheet. For ex-
ample, hedge funds such as
D.E. Shaw and Fortress Capi-
tal have been active on the
hospitality front.
A recent deal in Reno, Nev.,
attracted hedge fund money.
The purchase and repositioning
of the Grand Sierra Resort,
formerly the Reno Hilton, was
financed by unsecured notes
purchased by a hedge fund.
The borrower tried to go the
traditional mortgage route, but
lenders wanted more presales
for the project, which involves
converting 825 of the 1,995
rooms to residential condos.
Normally, lenders like to see
about 50% presales on this type
of arrangement.
When the presale threshold
proved to be too high and with
deadlines looming, the sponsor
decided to
seek funding
through a private bond offering
underwritten by CIBC World
Markets. But before the bond
could get rated and go to mar-
ket, the hedge fund purchased
the debt in the form of 20-year
unsecured notes.
Undoubtedly the attraction for
the fund was that a huge physi-
cal asset could be had below
replacement value and a big
chunk of the principal will
likely be paid down in a year as
the condos are converted and
sold.
Steve Gold and his
teammates at Hotel Financial
Strategies arranged the bond
offering and closed the deal.
