Blackstone Reaches Deal to Revamp Hilton's Debt

This article was in the Wall Street Journal over the weekend. It is a good sign that financiers are getting creative for handling potentially bad debt by cutting amounts, buying back debt at a discount and extending maturities dates.

"Blackstone Group has reached an agreement to restructure the balance sheet of Hilton Worldwide as it looks to improve the flagging fortunes of its single largest investment.

Hilton's lenders and Blackstone are finalizing a deal that would cut its $20 billion debt load by about $4 billion, according to two people familiar with the negotiations. The agreement calls for Blackstone's funds to contribute $800 million of new equity, which will be used to buy back debt at a discount. It would also extend the maturity of some debt issues, these people said.

The restructuring will help shore up Hilton's finances as it struggles through a downturn in the hotel industry. For months, some analysts have said there was a risk that Hilton might not be able to generate enough cash to stay current on its $20 billion of debt. Without a restructuring, Blackstone could have been forced to sell Hilton assets to cover its roughly $900 million in interest payments, according to the analysts.

A Blackstone spokesman declined to comment.

A number of large leveraged buyouts—walloped by the economy and large debt loads—have managed to stave off default over the past year by restructuring their balance sheets. They've been helped by high-yield markets, which have proven eager to snap up new debt of even the weakest credits.

Freescale Semiconductor Inc., the computer chip maker owned by Blackstone Group and three other private-equity firms, is expected to close Friday on a $750 million bond sale that will extend maturities on its debt. Friday, crafts retailer Michaels Stores Inc. said it extended the maturity on $900 million of loans.

Talks with Hilton's lenders have been contentious and dragged on for at least four months, according to several people involved. Roughly $4 billion of Hilton debt is held by the Federal Reserve, through a fund called Maiden Lane, which acquired the position from Bear Stearns Cos. when it brokered the collapsed investment bank's sale to J.P. Morgan Chase & Co.

Hilton is a poster child for overpriced acquisitions of the era. In July 2007 Blackstone agreed to pay $26 billion for the storied hotel chain. The firm's funds and co-investors put up $5.6 billion in equity in the deal and borrowed $20 billion in debt from a group of seven banks. The banks sold some of the debt to investors but ended up keeping much of it on their books after debt markets closed later that summer.

A collapse of the business-travel market has hit Hilton hard. Blackstone has written down the value of its equity investment by about two-thirds, according to people familiar with the firm.

The firm's real-estate unit has gotten more active over the past few months after a long fallow period. In September it acquired 50% of Broadgate, the largest portfolio of office buildings in London. And it's now considering joining Simon Property Group Inc.'s bid to buy bankrupt General Growth Properties Inc., according to people involved in that deal. The firm's real-estate funds have more than $12 billion in so-called dry powder to invest.

Separately on Friday, federal prosecutors in Manhattan acknowledged for the first time in a court filing that Hilton is under criminal investigation related to the alleged theft of confidential documents from rival Starwood Hotels & Resorts.

A Hilton spokeswoman said it continues to cooperate with the government's investigation."