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Blackstone moves to take full ownership of Stearns Lending when lender exits Chapter 11 bankruptcy

Blackstone and PIMCO reach tentative agreement over restructuring

When and if Stearns Holdings, the parent company of Stearns Lending, successfully completes a “comprehensive financial restructuring” and reorganization through Chapter 11 bankruptcy, the company will emerge with a new owner: Blackstone.

Blackstone acquired a majority stake in Stearns Holdings back in 2015. At the time, the private equity giant stated that it intended to provide Stearns with the “necessary resources to accelerate its growth and fuel its efforts to capture even greater market share.”

But plans changed earlier this year when Stearns unexpectedly declared Chapter 11 bankruptcy, under a proposed restructuring plan that would see Stearns “significantly reduce the company’s outstanding debt, continue Stearns’ operations and preserve the jobs of its employees, and better position the company for long-term success.”

Under that initial plan, Blackstone was to acquire “substantially all of the ownership” of Stearns in exchange for agreeing to serve as plan sponsor and contributing “substantial new capital” to Stearns.

But now, thanks to an agreement between Stearns, Blackstone, and PIMCO – which owns roughly two-thirds of the company’s 2020 notes – Stearns is on track. The company is set to emerge from bankruptcy with Blackstone controlling 100%.

That wasn’t the original plan, but the initial plan was challenged by PIMCO, another private equity giant.

As Bloomberg explains, Stearns approached PIMCO to discuss a reorganization but those negotiations fell through, leading to Stearns declaring bankruptcy.

From Bloomberg:

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.

PIMCO later demanded that Blackstone contribute a sizeable chunk of funding to Stearns operations, which Blackstone agreed to. In the initial bankruptcy agreement, Blackstone was to contribute $60 million in new investments as part of its role as plan sponsor and pledged to provide up to $35 million in “debtor in possession” financing.

Since that first announcement, Stearns, Blackstone, and PIMCO have been in negotiations. Stearns announced this week that the parties have reached a new agreement that will see Blackstone contribute more money in exchange for taking full possession of Stearns when it exits bankruptcy.

According to Stearns, Blackstone will serve as the plan sponsor and will contribute in new capital of $65 million plus additional cash to pay “certain claims” to Stearns in return for 100% of the ownership of the reorganized company.

That’s in addition to, among other things, debtor-in-possession financing of up to $30 million that Blackstone has agreed to refinance under the plan.

PIMCO agreed to this new arrangement because it will receive a substantial payout as part of the reorganization.

From the agreement:

In connection with the Global Settlement and in full and final satisfaction of their Claims and causes of action, the Consenting Noteholders have obtained significant value for holders of the Notes Secured Claims, as these holders will receive a pro rata distribution of (a) $65 million; (b) warrants to purchase non-voting Class B units in the Reorganized Debtors worth 15% of the aggregate value appreciation of the Reorganized Debtors above the New Money Investment (the “Warrants”); and (c) 5% senior unsecured notes due 2024 issued by the Reorganized Debtors on the Effective Date (the “New Notes”). This represents a substantial improvement as compared to the distribution that such holders would have received prior to the execution of the RSA and implementation of the Global Settlement. The Noteholders shall also receive releases from the Debtors and the Releasing Parties.

According to the agreement, the settlement “ends potentially expensive, extensive, and time-consuming litigation over Confirmation and provides for an expedited and efficient conclusion to these Chapter 11 Cases for the benefit of all stakeholders.”

It should be noted that this agreement is subject to approval by the judge overseeing the bankruptcy, so nothing will be finalized until the judge signs off.

Nevertheless, Stearns is in favor of this new agreement.

“We are pleased to have obtained the support of our largest noteholders as we take the next step forward in our efforts to reposition Stearns for future growth opportunities and enhanced profitability,” said Stearns Lending CEO David

“We have taken deliberate and proactive actions to reduce costs and refocus on our core businesses and this is an ideal outcome for our company. As a long-term investor in Stearns, Blackstone knows our business well and their desire to deepen their relationship and ongoing commitment to our business, employees and partners demonstrates their confidence in Stearns’ future prospects,” Schneider added. “We are grateful for Blackstone’s support, and with their partnership, we are well positioned to emerge from this process stronger than before.”

According to Schneider, Stearns “continues to operate as normal and the company remains focused on our mission of helping homebuyers find the best loans for their current and future needs.”

Schneider concluded: “We look forward to completing the process as quickly as possible, and we thank all of our employees for their continued hard work and dedication.”

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