Monday, November 17, 2008

More On DBSI
I missed this in my first read of today's Wall Street Journal article (linked in previous post):
DBSI also had investments in raw land and development projects and raised $275 million from thousands of small investors through private bond placements. It owns several small technology companies.
I knew about the raw land investments. I knew DBSI had offered private debentures before, too. I did not know it still had $275 million in debentures outstanding. What did DBSI do with all the money. In previous articles it was alleged that DBSI relied on syndication fees to support its master leases, not debenture proceeds, and when the credit crisis caused new deal flow to slow there was no longer syndication fees to supplement master lease payments. This is what supposedly caused the bankruptcy.

None of this makes much sense. Syndication fees, while they may be high on a particular offering, cannot support a portfolio of poor performing properties. Blaming the bankruptcy on DBSI's inability to sell new deals is a red herring. This morning, the $275 million in debentures is the big story. Is this number accurate and how did DBSI allocate this money? Even if it used the debenture proceeds for mezzanine financing, the bulk of this should have been repaid, at some point, by investor equity or permanent financing.

Many TIC investors should be OK. They should (and at this point who knows) own the properties. Each TIC investor group will have to deal the properites, and it will be messy, but there is an asset supporting the process. TIC investors need to keep cool and look to the long term. Rash decisions on particular properties could make this situation worse.


Anonymous said...

As a newbie in the TIC environment I need to ask this... how does the TIC investments, and the MasterLease affect what will happen to the notes and land fund, and land option fund holders?

Rational Realist said...

This is a good question, and one that will go to heart of DBSI's restructuring. Theoretically, the TIC investments should be separate from the notes, land fund and options. It appears, from WSJ articles, that all are being intertwined. I am unfamiliar with the notes and land funds. I hope the TIC properties can be extracted.