Starwood Capital Group is facing allegations that it misled investors about the risks of its Israeli bonds that backed struggling shopping centers in the U.S.
The lawsuit stems from the struggles facing Starwood’s mall portfolio, where vacancy rates have increased and net operating income dipped, according to Wall Street Journal. It also adds to the challenges facing investors who bought debt in the once booming Israeli-bond market as the market has now soured.
Two groups of bond investors, known as Oporto Securities Distribution, filed the class-action lawsuit on March 24, alleging Starwood failed to properly disclose risks involved in the debt, according to the Journal. The lawsuit claims the damages total 74 million shekels or $21 million.
The bonds, which are backed by seven malls and trade in Tel Aviv, have fallen almost 50 percent in price since they were first offered in March 2018.
The investors are also suing S&P Global Ratings’ Israeli subsidiary, where it alleges that a ratings report failed to state that Starwood might not be able to repay certain debtors, according to the Journal.
Miami Beach-based Starwood bought a portfolio of malls in California, Indiana, Ohio and Washington state from Westfield Group in 2013. It then refinanced the portfolio by raising 910 million shekels (about $250 million) on the Israeli bond market.
Starwood said in a statement that the allegations are without merit, according to the Journal.
A number of real estate firms such as Extell Development, Delshah Capital and GFI Real Estate Limited turned to the Israeli bond market, where financing was cheaper than in the U.S. In recent months, that market has taken a turn, and bonds issued by American companies in Israeli have seen values fall at unprecedented rates. [WSJ] — Keith Larsen