08/14/2009

Barclays Extends $2 Billion Crescent Loan

Barclays has granted a three-month extension on a $2 billion floating-rate loan that helped finance Morgan Stanley's ill-fated takeover of Crescent Real Estate Equities at the top of the market.

The extension, until Nov. 2, gives Morgan Stanley more time to address Crescent's property portfolio, whose value has plunged since the $6.5 billion buyout in August 2007. Morgan Stanley has sold $1.4 billion of Crescent properties, enabling it to reduce the original $3.3 billion balance of the Barclays loan. But the sales effort has been slowed by the illiquid market. If Morgan Stanley is unable to pay down or refinance the remaining debt, the result could be one of the larger defaults in the downturn so far.

In a regulatory filing last Friday, Morgan Stanley said it was in talks with Barclays "regarding the orderly transfer of collateral and asset operations and other related matters." That vague wording could mean that Morgan Stanley plans to turn over the keys of properties to Barclays or that it will keep trying to sell properties. At another point in the filing, Morgan Stanley said it "will continue to evaluate the Crescent properties and position them for sale as opportunities arise." A spokesperson declined to elaborate. The filing didn't identify Barclays as the lender, but Barclays led the financing for the Crescent takeover.

The Barclays loan is nonrecourse, but Morgan Stanley has agreed to supply credit support of up to $125 million. It's unclear if that was a quid pro quo for the extension.

Morgan Stanley has borrowed an additional $500 million from one or more other lenders, bringing its total current debt on the Crescent portfolio to $2.5 billion.

Like other investors that acquired properties as the market was peaking, Morgan Stanley has been hammered by the subsequent freefall in prices. The bank's property arm, Morgan Stanley Real Estate, intended to place Crescent's properties in one of its commingled investment funds, but was unable to do so when the market went south. Morgan Stanley ended up having to consolidate the assets on its balance sheet, and they now represent the company's biggest real estate headache.

As of midyear, Morgan Stanley valued Crescent "and other consolidated interests" at $3.7 billion, or 80% of the company's $4.6 billion of total equity investments in real estate. It's believed that Crescent accounted for the bulk of the $3.7 billion.

On a July 22 conference call about Morgan Stanley's second-quarter earnings, one analyst questioned whether the bank has adequately written down its Crescent investment. Colm Kelleher, Morgan Stanley's chief financial officer, replied that the bank doesn't discuss its valuations on individual investments.

In the first half of the year, Morgan Stanley reported $1.7 billion of losses on its equity real estate investments. Some $600 million of that was attributed to "Crescent and other consolidated interests."

By contrast, Morgan Stanley has fared much better on its investments in commercial MBS and commercial mortgages. Among the capital-markets groups of 13 major Wall Street lenders, Morgan Stanley was the only player to be in the black on those holdings since the financial crisis began, thanks largely to shrewd hedging, according to a review by Commercial Mortgage Alert.

In the acquisition of Crescent, a REIT in Fort Worth, Texas, Morgan Stanley assumed 54 office buildings comprising 23 million square feet, as well as resort developments in Scottsdale, Ariz., Vail Valley, Colo., and Lake Tahoe, Calif.

Since then, Morgan Stanley has sold its full or partial stakes in 16 of Crescent's properties and other assets, fetching $1.4 billion in total. But since last October, its marketing campaigns have flagged, as weakening real estate fundamentals and tight credit drove buyers to the sidelines. For example, the potential sales of two large office complexes in Houston fell through in last year's fourth quarter. Morgan Stanley was in talks to sell Greenway Plaza to Cousins Properties for $700 million and Post Oak Central to CB Richard Ellis Investors for $243 million.

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