In a move which gives new meaning to “troubled asset recovery”, the Federal Reserve Bank of New York has gifted private equity giant Blackstone with USD 178 million. In early October, the Federal Reserve Bank of New York announced it had sold back to Blackstone USD 320 million in debt from the heavily leveraged 2007 Hilton buyout for just 142 million, booking a 56% loss.
The difference between the face value of the debt – backed by Hilton properties – and the money taken in by the sale amounts to a USD 178 million public subsidy to the buyout house.
The Fed acquired 4 billion dollars worth of Hilton debt as a result of the forced merger of the collapsing Bear Stearns with JP Morgan (see Blackstone’s Hilton woes will weigh on workers [1] on the IUF's Private Equity Buyout Watch), where it was parked in a vehicle called ‘Maiden Lane’. The Fed paid a premium for the paper on Bear’s books while underwriting the operations on generous terms to shareholders. Since 2009, Blackstone has been scrambling to avoid stratospheric interest payments on 20 billion dollars borrowed to finance the Hilton deal by buying back its own debt on the cheap and rescheduling maturity. So far this year, Blackstone has managed to lop off some USD 4 billion.
“We were in good shape before and we’re in exceptionally good shape now,” Hilton CEO Chris Nassetta recently told investors.
Hilton workers have yet to see the benefits of this bountiful public subsidy. On October 18, members of UNITE HERE at the San Francisco Hilton on Union Square struck for 6 days (Hilton workers in other cities also took action) to protest Hilton’s demands for major contract concessions at a time of healthy occupancy and rising rates.
The Hilton workers have been without a contract for some 16 months since the previous agreement expired. Hilton is insisting that workers assume over 200 dollars a month in medical contributions and accept a pension freeze while trying to reduce staffing and increase workloads. Hilton is now pushing for a “Refresh Program” which would require housekeepers to clean 20 rooms daily – a 40% increase over the current 14 won after hard struggle and established in the previous contract.
Guadalupe Chavez, a housekeeper quoted on the union’s website [2], says ““Blackstone is still an obstacle to our recovery, lining their pockets while taking advantage of taxpayers and preventing a strong recovery for working families.”
Working conditions at Hilton, however, are unlikely to figure in the next industry-financed study of how private equity “creates value” for investors while generating employment. And the Fed should be publicly challenged to explain the logic behind this extraordinary act of charity to an investment fund which already benefits from massive tax advantages at a time when “austerity” is the new mantra.