“Bloomberg – Connecticut and Hartford Get $2 Billion Offer for Properties“
Connecticut is a fiscal disaster. Their decades long episode of legislative ineptitude has put the Nutmeg State in a perilous financial position that most government officials only dream about. As it stands, CT has one of the worst public pension systems in America with an embarrassingly low 44% funding ratio, one of the largest per capita tax burdens in the nation and a shrinking tax base as corporations and citizens flee the state.
You can only operate in that way for so long before markets smell the blood in the water, and it seems like one fund just got its first whiff. Chicago-based Oak Street Real Estate Capital sent a LOI to the state capital last week, offering up to $2B in cash in exchange for certain state-owned properties structured as a leaseback, yielding 7.25%. For anyone unfamiliar with a leaseback, this is when a company sells properties and/or heavy machinery to a buyer and then leases it back for continued use. This is a common way to generate liquidity for cash-strapped companies whose fixed assets are generally worth more than the business itself, like Oak Street’s neighbor, Sears Holdings.
Sears, like Connecticut, is a balance sheet disaster. Eddie Lampert bought Sears years ago through his fund ESL Investments. In a bid to free up cash and provide some short term flexibility, he sold Sears’ best performing properties into a publicly-traded REIT called Seritage Growth Properties. The asset sale was structured as a leaseback, allowing Sears to continue using the properties as retail outlets, generating a healthy rental yield for Seritage shareholders and protecting ESL LPs from the eventual Sears bankruptcy, as they own a healthy chunk of Seritage partnership units as well. The move was savvy financial engineering which, in the face of what will be a well-publicized credit event, Lampert doesn’t get enough praise for. While the move will ultimately benefit ESL’s investors and the ridiculous corporate structure they set up with Sears, it is going to destroy the company, as the now struggling retailer has the added expense of paying rent to its own investors – and that is most likely the same fate that awaits Connecticut if they try to financially engineer their way out of this mess. They couldn’t agree on a simple budget for years, I’d love to see how they navigate the asset-backed lending markets.