The Blackstone Group has decided to bypass the bank loan market to finance its $3.1 billion acquisition of Extended Stay America. Instead, the private equity firm is financing the hotel chain buyout with commercial mortgage-backed securities (CMBS), according to a market source. The news came after investors had been looking forward to sinking their teeth into the hefty $2.7 billion new money bank credit that was expected to back the acquisition. Bear Stearns, who advised Blackstone on the acquisition, and Bank of America were earmarked to arrange the deal's financing at the time it was announced earlier this month.
A spokesman from Blackstone did not comment on how the Extended Stay transaction was being financed, but he did note that it is common for the private equity firm to use CMBS in its real estate deals.
To be sure, Blackstone is currently involved in the CMBS market. Standard & Poor's recently released a presale report on a $460 million commercial mortgage pass-through certificate deal being sold by Bear Stearns Commercial Mortgage Securities Series 2004-HS2. The deal is collateralized by mortgage loans secured by extended stay properties (overnight accommodations that incorporate components of both a traditional hotel and an apartment residence), and Blackstone is said to be providing strong sponsorship to the deal through its Homestead Village Management portfolio company. Incidentally, Homestead will oversee management of Extended Stay once the acquisition is completed. Bear Stearns, BofA and Credit Suisse First Boston are underwriting this deal, which is scheduled to close April 1.
In fact, a bank loan investor said that while it is not necessarily common for an acquisition like this one to be completely financed with CMBS, many companies that own most of their properties, such as Extended Stay, often have some mortgage-backed debt within the mix of their capital structures.
"Blackstone probably realized that financing [the buyout] through CMBS would be cheaper than with a bank deal," he added.
Extended Stay, presently rated BB-/Ba3, currently has a $500 million term loan, a $200 million revolver and $200 million in delayed draw term loans. Pricing on the tranches are between Libor plus 225 and Libor plus 275 basis points. Morgan Stanley, who advised Extended Stay on the acquisition, is the lead arranger on the company's existing debt, while Bear Stearns is a syndication agent.
The $3.1 billion price tag for the acquisition transaction includes Blackstone's assumption of the Spartanburg, S.C.-based company's existing bank debt and $500 million of outstanding subordinated notes. The transaction is scheduled to close next quarter. Affiliates of Blackstone Real Estate Partners IV and Blackstone Capital Partners IV are the specific acquiring entities in the deal.