Colony share capital plummets 20% as debt fight continues

What happened

Shares of Colony Capital, Inc. (NYSE: DBRG) are down 18.6% as of 2 p.m. EDT on July 16 after falling 20% ​​earlier in trading. Today’s sale came after the company issued a press release after the market closed yesterday, saying it was offering a private offer to raise $200 million, with the plan to use the proceeds to redeem and redeem 3.875% Convertible Senior Notes which are due in 2021.

So what

It’s a bit strange that shares would drop so sharply on the news that the company is lining up additional cash, especially since the new debt would be due in 2025 and would be used to pay off debt maturing in 2021. The company also discontinued its dividend. for now, a prudent move given that many of its properties are not even generating enough cash to meet loan obligations.

Empty hotels are a major problem for Colony Capital. Image source: Getty Images.

It’s likely that the company’s debt investments — not the debt it takes on to pay off other obligations — are the biggest concern. Colony Capital announced in May that it was trying to work with lenders in its hotel portfolio – some of which were already in default – and that the risk of default and foreclosure is significant. According to reports, the company is at risk of losing control of two hotel portfolios financed by commercial mortgage-backed securities, holding nearly 140 properties with 14,987 rooms combined.

Now what

While Colony Capital, the company, is proving capable of raising capital to settle its debt at the corporate and subsidiary level, it is less successful in renegotiating property-backed debt. Loss of properties to foreclosure destroys shareholder value; both the loss in the book value of the property and the loss in the cash flows that these assets can generate in normal market environments.

Hotels in particular are highly exposed to the ongoing COVID-19 pandemic, and investors are clearly concerned about Colony Capital’s portfolio of hotels, which is on track to become much smaller with limited, if any, recourse. for the company to recover anything. It looks like Colony Capital itself is likely to survive, but it’s much less clear how much asset value it could lose during the downturn, as long as lenders don’t play the game on renegotiating mortgage debt at the property level.

That said, it’s probably best to keep it on your watch list for now and let the worst of the recession play out so we have a better idea of ​​what things will look like on the other side before we go. invest. Things may well get worse before they get better.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Sallie R. Loera