A Morgan Stanley real estate fund won an agreement with lenders for a 60-day extension on about $2.4 billion in loans used in a troubled hotel investment in Japan, two sources with knowledge of the deal said.

The extension will give the fund a chance at holding onto the chain of 13 hotels it bought from All Nippon Airways <9202.T> for about 280 billion yen ($3 billion) in 2007 in what ranked as the largest hotel transaction in Asia.

Property prices have since fallen sharply in the wake of the financial crisis, and the value of the fund's investment is widely thought to have sunk well below the 225 billion yen ($2.4 billion) in loans it took on to finance the deal.

Lenders Citigroup Inc , Shinsei Bank <8303.T> and Singapore sovereign wealth fund GIC have agreed to a 60-day extension beyond an April 25 deadline, said the sources, who were not authorized to speak publicly about the negotiations.

Officials for Morgan Stanley, Citigroup, Shinsei and GIC declined to comment.

The hotel deal helped cement Morgan Stanley's reputation as one of the most aggressive investors in real estate globally and gave fuel to a property bubble in Japan that, when it popped in 2008, sent dozens of developers into bankruptcy.

The hotels were purchased by a fund known as Msref VI. Morgan Stanley has warned investors that the $8.8 billion fund could lose as much as $5.4 billion, according to recent reports in the Wall Street Journal and Financial Times.

Citigroup, Shinsei and GIC will negotiate with the fund on a new transaction during the extension period, the sources said. This could involve bringing a new equity investor into the deal, one of the sources said.

Generally speaking, lenders are better off if they allow borrowers more time to work on a troubled transaction, said Junichi Shimizu, a credit analyst at Deutsche Securities. That way they have a better chance to maximize loan recovery.


Citigroup and Shinsei together extended 180 billion yen in loans for the deal, composed of 120 billion yen in senior loans and 60 billion yen in junior loans. A portion was syndicated to other banks, sources have told Reuters.

GIC provided 45 billion yen in loans that were junior to the loans provided by Citigroup and Shinsei.

In the case of default, GIC has the right to negotiate with Citigroup and Shinsei to buy their loans and take control of the property, a person familiar with the transaction said.

This has prompted speculation that GIC could become the new owner of the hotel chain, which includes the ANA Intercontinental Tokyo in Tokyo's Roppongi area and two hotels in resort areas on the southern island of Okinawa.

The portfolio of hotels is now likely worth just 150 billion yen, or a little more than half the original purchase price, according to the estimates of two bankers who are not directly involved in the deal.

Other aggressive property investors have had to hand away the keys to properties due to the market's sharp downturn.

Late last year Shinsei seized control of the Pacific Century Place office building in central Tokyo after the original owner, Davinci Holdings <4134.OJ>, was unable to pay its loans on time.

The building, one of three properties snapped up by Davinci in Tokyo for a combined 443 billion yen, was sold to property fund manager Secured Capital Japan <2392.T>. (Additional reporting by Lee Chyen Yee and Michael Flaherty in Hong Kong; Editing by Nathan Layne)