Blackstone and Pimco Tussle as Mortgage Lender Goes Bankrupt

(Bloomberg) -- Blackstone-backed mortgage lender Stearns Holdings LLC filed for bankruptcy as it seeks to clean up its debt-plagued balance sheet.

The Chapter 11 filing in New York shows that Blackstone Group Inc., which acquired a majority stake in 2015, could wind up owning most of the rest of Stearns. It’s the 20th-largest U.S. home lender, with about 2,700 employees and 100 retail offices, according to court papers.

Stearns blamed rising interest rates from late 2016 through 2018 for cutting into demand for residential mortgages, as well as a back-and-forth tussle with Pacific Investment Management Co. over potential solutions. The home lender said it will consider bids from other investors who might want to replace Blackstone. In the meantime, New York-based Blackstone will provide a $35 million bankruptcy loan to keep the company running, and also pledged to invest $60 million of new money, Stearns said in a statement.

Stearns said it also lined up $1.5 billion of warehouse financing to keep its mortgage business operating. Warehouse loans provide cash to mortgage lenders so they can fund home purchases and refinancings and hold the mortgages until they’re sold off to investors.

The company’s court filing listed $1.22 billion of assets and $1.16 billion of liabilities. It follows an attempt to negotiate an extension with existing noteholders ahead of a 2020 debt maturity.

Pimco’s Stake

Pimco owns about 67% of the company’s 2020 notes, Stephen Smith, chief financial officer of Stearns, said in a court declaration. As the maturity grew nearer and the company’s warehouse lenders expressed concerns about its liquidity, Stearns approached Pimco about a restructuring, Smith said.

Stearns proposed a partial paydown of the debt, a maturity extension and relief from a requirement to use $42 million in proceeds from the sale of mortgage servicing rights to tender for the notes. Pimco rejected that offer and others, insisting it would consider a $50 million capital infusion into Stearns from Blackstone, or taking control of the business.

Pimco would later refuse an offer to take ownership of Stearns, according to Smith, because its funds could not or would not take equity stakes in an enterprise. Instead, Pimco demanded to have its notes cashed out, or else it would insist on a liquidation.

Warehouse Lenders

“Needless to say, the liquidation alternative was completely and totally unacceptable to the debtors and Blackstone,” Smith wrote, citing the impact on 2,700 employees. The company offered to cash out Pimco’s notes at a discount, which the filing didn’t specify. Pimco rejected that idea and revived a demand that Blackstone make a significant equity infusion, he wrote.

As the dispute dragged on, the company lost support from its warehouse lenders as they ramped up demands for collateral and covenants, the filing shows. One lender dropped out June 28 and another said it would stop new advances on July 15, spurring fears that other lenders would follow suit and shut the company down.

Plans call for Stearns to solicit other bids that could replace Blackstone as the company’s owner. Offers have to be all cash, including from noteholders, and no one will be allowed to use their debt holdings as currency for a credit bid, the filing shows. Blackstone won’t get a breakup fee if a better bid emerges, and the plan doesn’t contemplate a court-supervised sale process. A Pimco representative declined to comment.

Stearns’s debt was in place prior to Blackstone’s investment in 2015, when funds managed by the private equity giant acquired the majority stake. Stearns hired Skadden, Arps, Slate, Meagher & Flom LLP as its legal adviser, PJT Partners as its financial adviser and Alvarez & Marsal as its restructuring adviser.

The case is Stearns Holdings, LLC, 19-12226, U.S. Bankruptcy Court, Southern District of New York (Manhattan)

--With assistance from Jeremy Hill and Nicole Bullock.

To contact the reporter on this story: Katherine Doherty in New York at kdoherty23@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Boris Korby

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