An Article From Bloomberg News

IStar Said to Weigh Pre-Packaged Bankruptcy Filing Next Year
By Jeffrey McCracken and Jonathan Keehner - Sep 21, 2010 2:40 PM PT

IStar Financial Inc., the commercial real estate lender trying to restructure some of its $8.6 billion of debt, may seek bankruptcy protection after creditors blocked it from amending loans, said people with knowledge of the plan. IStar fell 13 percent.

The company expects to begin meeting with creditors in coming weeks to discuss potential terms of a so-called pre- packaged bankruptcy, which wouldn’t occur until sometime next year, said the people, who asked not to be identified because the plan isn’t public. IStar, led by Chairman and Chief Executive Officer Jay Sugarman, hasn’t yet held talks with creditors on a possible bankruptcy. That process is likely to begin as soon as next month, the people said.
IStar, which has a market capitalization of about $316 million after shares lost more than 90 percent of their value since 2007, hired Lazard Ltd. and Kirkland & Ellis LLP to advise on the debt restructuring, the people said.

The New York-based company made loans on properties including the Trump SoHo hotel- condominium building in lower Manhattan.

“IStar grew as the markets shot up and concentrated in asset classes that are particularly cyclical such as hotels and construction,” said Ben Thypin, an analyst at Real Capital Analytics Inc. in New York. “Their fortunes are closely tied to the market and their future is now uncertain.”

Bankruptcy is one option the company is weighing. It is also considering a proposal to extend maturities on its debt as well as a potential exchange offer, according to two people familiar with the situation.

Silver Point, Monarch

Andrew Backman, a spokesman for iStar, didn’t return a phone call or an e-mail message seeking comment. Sugarman didn’t return a call.

Hedge funds that hold some of iStar’s $2.9 billion of second-lien loans include Silver Point Capital LP, Davidson Kempner Capital Management LLC and Monarch Alternative Capital LP, according to two of the people. Some of the funds, which are represented by Akin, Gump, Strauss, Hauer & Feld LLP, opposed iStar’s bid to amend terms of the loans to repurchase debt at a discount, the people said.

IStar withdrew the proposed revision and has begun the process of planning for a potential bankruptcy as it is faced with about $2.6 billion in debt coming due next June, one of the people said. The company also has an optional $500 million first-lien debt payment due at the end of September that it may not make, according to the person.

Foreclosures

In a pre-packaged bankruptcy, a company negotiates terms of a reorganization with its key stakeholders before filing for Chapter 11 protection, allowing the proceedings to finish in weeks or months rather than years.

Representatives of Lazard, Akin Gump and Silver Point declined to comment. Representatives of Kirkland, Davidson Kempner and Monarch didn’t return messages for comment.

The company had net debt obligations of $8.6 billion as of June 30, according to a regulatory filing last month. IStar had about $3 billion of non-performing loans as of June 30 and reported an $83.4 million second-quarter loss, excluding income from property sales.

“Convincing lenders that iStar can repay its obligations in full at some point down the road appears to be a tough sell due to uncertainty around the value of its collateral,” analysts at debt-research firm CreditSights Inc. wrote in a report last month. “Negative earnings continue to be driven by the weak credit performance of iStar’s portfolio.”

Credit Rating

IStar foreclosed on nine properties during the second quarter and said loss reserves totaled $1.18 billion, or about 16 percent of the loan volume it manages.

The company, a real estate investment trust, began in 1993 and was previously called Starwood Financial Trust.

IStar’s debt and equity plunged in the second half of 2007 as commercial-property prices fell and capital markets seized up as losses on subprime-mortgage securities spread to corporate bonds. Moody’s Investors Service in September 2008 cut the company’s credit rating to below investment grade.

While iStar shares have risen more than 36 percent this year, investors who held the stock from the end of 2007 would have lost about 85 percent.

IStar fell 53 cents, or 13 percent, to $3.48 as of 4:07 p.m. in New York Stock Exchange composite trading, after reaching $2.88 earlier today.

The firm’s $501.7 million of 8.625 percent bonds due in 2013 fell 5.6 cents to 78 cents on the dollar, the lowest since March, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. IStar’s $448.4 million of 5.95 percent bonds due in 2013 fell 3 cents to 75 cents on the dollar, according to Trace.

“The firm should not become insolvent and has ample liquidity to operate through 2010, but management faces a significant challenge with $3 billion in debt coming due in 2011 and $3.5 billion due in 2012,” Standard & Poor’s said July 30.

S&P earlier said it believed there was a “likelihood” the real estate investment trust would use a so-called distressed exchange to restructure the debt maturing next year and in 2012.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Jonathan Keehner in New York at jkeehner@bloomberg.net.

To contact the editors responsible for this story: Jeff St.Onge in London at jstonge@bloomberg.net; Alec McCabe in New York at amccabe@bloomberg.net.