M.Stanley funds face Tokyo property debt deadline

Wed Feb 16, 2011 6:06am EST

* MSREF faces loan deadlines on two $1 bln-plus Tokyo bldgs

* Loans on Shinagawa Grand Central Tower due April 15-sources

* Debt on former Shinsei headquarters matures in July-sources

* Blackstone would get sales rights to one if default-sources

By Junko Fujita

TOKYO, Feb 16 (Reuters) - Morgan Stanley funds could lose the
keys to two prime office buildings in Tokyo when the debt matures
in the next few months, sources said, the latest fallout from a
series of highly leveraged investments in the run-up to the
financial crisis.

Morgan Stanley (MS.N) was one of the most aggressive
investors in global property markets during a debt-fuelled boom
that fizzled out in 2008. Japan was one target region for
investments made through funds known as MSREF.

MSREF V, a $4.2 billion fund, faces an April 15 repayment
deadline for loans on the 32-storey Shinagawa Grand Central
Tower, which it bought for 140 billion yen ($1.67 billion) in
2004, two sources with direct knowledge of the transaction said.

Also, the $8.8 billion MSREF VI is confronting a decision on
the former headquarters of Shinsei Bank (8303.T) when debts on
that building -- bought in 2008 for 118 billion yen -- mature in
July, three sources familiar with that deal told Reuters.

The value of the properties has fallen well below that of the
debt, analysts and sources said, raising the prospect that the
funds will fail to repay or refinance the loans and hand control
of the buildings over to lenders.

Private equity firm Blackstone Group LP (BX.N) holds the most
junior portion of the debt on the Shinagawa building and
therefore would gain the right to market the building for seven
months from April if MSREF V defaulted on the loans, sources

The sources spoke on condition of anonymity due to the
sensitive nature of the matter. A Morgan Stanley spokeswoman in
Tokyo declined to comment.

A default would not likely come as a major surprise to
industry watchers. About a year ago, Moody's Investors Service
cut its ratings on securitised bonds which market experts say are
backed by the Shinagawa tower.

The most senior debt, or class A debt, was cut by two notches
to Aa2 (sf), class B debt was lowered by four notches to A3 (sf),
and class C downgraded six notches to Baa3 (sf).

"We downgraded the bonds based on an assumption that the
borrower may not be able to refinance the debt," said Koji
Kumamaru, an analyst at Moody's, which as a general policy does
not identify the specific properties backing rated bonds.