MSREI behind Japan’s largest CMBS default

The future of Tokyo’s Shinagawa Grand Central Tower is likely to be determined by The Blackstone Group and other parties after Morgan Stanley Real Estate Investing today defaulted on its $3.3 billion debt – the biggest default ever on a Japanese CMBS debt.

Morgan Stanley Real Estate Investing (MSREI) has handed the keys of Tokyo’s Shinagawa Grand Central Tower to investors, including The Blackstone Group, after failing to meet its debt obligation on the 32-storey office building.

Reuters today reported that MSREI failed to meet the deadline to repay its ¥278 billion (€2.3 billion; $3.3 billion) debt on the office, home to tenants such as computing giant Microsoft.  The debt was securitised via a commercial mortgage-backed securities structure, with Blackstone as one of the junior lienholders. As is typical procedure in Japanese CMBS scenarios like this, Blackstone will be able to jointly market the asset for sale.

The failure by Morgan Stanley to meet its debt obligation on the building represents the biggest default to have happened on a CMBS debt in Japan, dwarfing the default by KK daVinci on Pacific Century Place in December 2009, the debt of which also was packaged into a CMBS structure. MSREI declined to comment. Blackstone was unavailable for comment.

MSREI originally bought the property in 2004 on behalf of its $4.2 billion MSREF V fund for ¥140 billion (€1.16 billion; $1.6 billion) from Mitsubishi Corporation and Mitsubishi Motors, which also were tenants at the time. The firm refinanced the loans used to acquire the building via a ¥112 billion CMBS structure in 2005 and then, in 2007, it refinanced the debt again, this time via a much bigger ¥278 billion CMBS structure.

Since then, the property, like many others bought using high leverage at the top end of the market cycle just before the global financial crisis, has fallen in value to below that of the debt used to buy it, rendering MSREI’s control of it away. However, it is unlikely MSREF will suffer much of a material loss. “MSREF bought it in 2004 and refinanced it in 2008, at the very peak of the market and non-recourse one PERE source said. “They took out something like $1 billion in profit already, so the default hurts their image but not their bottom line.”

The source said that the property would likely be more attractive to a domestic buyer adopting a core strategy than a private equity real estate opportunity fund when it is marketed for sale: “It is the type of asset that is high quality, new and in the right kind of location, so domestic buyers will be very interested. It's too high quality a building to go at a distressed price, and it's too big a total dollar value for virtually any opportunity fund active in Japan in 2011.”

According to Reuters, MSREI also is facing a similar looming deadline on the debt for another of its sizeable assets, the Shinsei headquarters. That asset was acquired by MSREF V’s successor fund, the $8.8 billion MSREF VI fund, the capital of which also was used in very expensive transactions. The debt of that building matures in July.

Last year, MSREI managed to avoid handing the keys back on a portfolio of hotels bought from Air Nippon Airways for ¥280 billion in 2007, despite a period of uncertainty. That debt was renegotiated with Citigroup and Shinsei Group.