Starwood Capital’s Trouble in Israel Deepens Over Defaulted Bond Offering

First American News LLC-Raleigh, NC: Lawsuit alleges Starwood misrepresented and omitted some risks in prospectus. Israel’s securities regulator said it would financially support a class-action suit involving a soured Starwood Capital Group bond deal, a move that comes as that country’s once-popular debt market with U.S. real-estate investors is getting tougher on some foreign companies.

The lawsuit, filed in 2019, alleges that Starwood misrepresented and omitted some risks in the prospectus for a bond offering of 910 million shekels ($281 million), which was backed by a group of U.S. malls. The lawsuit alleges that there was insufficient disclosure about lease covenants and ratings on loans connected to some of the underlying assets.

The Israel Securities Authority in December said that it decided to pay a portion of the lawsuit’s legal expenses because it feels the lawsuit was in the public interest and has a reasonable chance of being certified by an Israel court. A spokeswoman for the authority said its action doesn’t mean that it supports the plaintiff’s position in the lawsuit.

The lawsuit alleges damages of about 99.6 million shekels, according to the regulator’s public statement. Starwood and its officers “allegedly did not meet the disclosure obligations that apply to them” because its prospectus was “missing and misleading and material details were omitted from it,” the authority’s statement said.

The suit is expected to move forward in the Israel courts later this year.

A spokesman for Starwood pointed out in a written statement that the private-equity firm has said that it believes the allegations in the lawsuit to be without merit. “The [authority] has previously provided funding for many pending lawsuits and it does not affect the merits of any of the cases,” he said.

The Israel bond market was a popular place for U.S. real-estate companies, which raised billions of dollars in the years after the 2008 financial crisis. Many U.S. real-estate companies tapped the Israeli bond market because they could borrow at lower interest rates than with certain loans in the U.S., and Israel’s bond market often provided more flexible terms.

Issuers included commercial property companies such as Silverstein Properties Inc., one of the developers of the World Trade Center, and Related Cos., which developed New York’s Hudson Yards complex. New York luxury condo developer Extell Development Co. also sold bonds in Israel.

But the Israel Securities Authority began to crack down on certain foreign bond sales last year after several high-profile bond offerings, including the Starwood mall portfolio, ran into trouble and led to big losses for Israeli investors. In 2021, the authority proposed new disclosure requirements directing fund managers to notify investors of potential risks of buying bonds issued by certain foreign borrowers “with no affiliation to Israel.”

Since the new regulations were proposed, there has been only one new bond issue by a foreign issuer with no affiliation to Israel that hasn’t issued bonds in that market in the past.

A spokeswoman for the authority said the lower issuance volume “corresponds with the general tendency in Israel of increased equity issuances rather than debt issuances.”

The lawsuit against Starwood involves a portfolio of malls in California, Indiana, Ohio and Washington state. Starwood purchased the properties in 2013 from mall giant Westfield Group and refinanced the portfolio in 2018 through the bond sale in Israel.

After the bond sale, the portfolio ran into financial difficulties partly because of the pandemic and increasing competition from online retailers. Starwood defaulted on the debt and lost control of the properties in 2020.

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