Hilton’s LBO unwinds

By Felix Salmon
September 16, 2009
described it as crazy, adding that the lenders (including Bear Stearns, bless 'em) were "taking equity-like risk" for pretty modest returns. So it comes as no surprise to learn that Blackstone, the buyer, has not only written down its investment by half, but is also looking to restructure Hilton's debt.

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The LBO of Hilton hotels made no sense even at the time: I described it as crazy, adding that the lenders (including Bear Stearns, bless ‘em) were “taking equity-like risk” for pretty modest returns. So it comes as no surprise to learn that Blackstone, the buyer, has not only written down its investment by half, but is also looking to restructure Hilton’s debt.

The interesting thing here is the way that Blackstone is planning to do this: it essentially wants to convert Hilton’s outstanding loans into bonds. Which might come as some relief to the US taxpayer: we own a whopping $4 billion of Hilton debt inherited as part of the Bear Stearns bailout. If the bond markets are frothy enough to show appetite for Hilton debt right now, I’d happily sell it to them.

Update: See also the way that Warner Music Group turned $1.1 billion of loans into bonds. Although, as Vipal Monga notes, a lot of the time “refinancing loans doesn’t eliminate the debt, it just replaces lower-priced loans with more expensive bonds, increasing the interest burden on the companies”.

2 comments

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Reminds me of the anecdote from this article:
http://www.thedeal.com/newsweekly/2009/s ept-14-2009/nice-work-if-you-can-get-it. php

Deal was crazy, yes, but crazy good also…

Posted by Duff Samoa | Report as abusive

The restructuring is quite logical.

Example: (I made up the dollar amounts and haircut percentage)
1. Convert $100m in loans into $80m in bonds;
2. The government takes a 20% haircut;
3. The new lenders take less risk;
4. Despite having their equity wiped out in the original deal, the “owners” end up with new equity and keep the properties.

Everyone wins – except Uncle Sam.

Posted by Brad Ford | Report as abusive