The prospectus for Blackstone Inc.’s now-defaulted commercial mortgage-backed security extolled the central location and tenants of its top holdings.

The properties included two hypermarkets with two of Finland’s biggest retailers S-Group and Kesko Oyj as tenants, according to the note’s offering documents. Still, two thirds of the portfolio was made up of small suburban office properties, many appearing to date from the 1980s, with less than €10 million ($10.6 million) of the loan facility allocated to each of them.

Blackstone defaulted on a €531 million bond backed by a portfolio of Finnish offices that it put together when it acquired landlord Sponda Oy in 2018. The private equity company sought an extension from holders of the securitized notes to dispose of assets and repay the debt in exchange for injecting fresh capital, people with knowledge of the plan told Bloomberg News. The bondholders rejected the proposal.

The loan underlying the notes has now matured and has not been repaid, prompting loan servicer Mount Street to determine a default, according to a statement Thursday. The loan will now be transfered into special servicing, it added. Special servicers are typically tasked with helping determine a work-out plan in the event of default.

“This debt relates to a small portion of the Sponda portfolio,” a Blackstone representative said in an emailed statement Thursday. “We are disappointed that the servicer has not advanced our proposal, which reflects our best efforts and we believe would deliver the best outcome for note holders. We continue to have full confidence in the core Sponda portfolio and its management team, whose priority remains delivering high-quality retail and office assets.”

Blackstone’s plans to gradually sell off the properties  — which were among the lowest quality in the original Sponda portfolio — hit a stumbling block in March 2020 when Finland imposed some of the strictest travel restrictions in Europe. That effectively cut off international buyers that couldn’t travel to the country to inspect the properties.

Then, just as restrictions were being eased, Russia invaded Ukraine. The move proved a particular issue for commercial real estate in Finland because the country shares a long land border with the aggressor.

The geopolitical uncertainty and the rapid rise in interest rates that followed has ensured that transaction volumes for secondary commercial property in Finland have remained threadbare, making valuations hard to judge.

Fitch Ratings downgraded the notes in December, saying that a “weak macroeconomic outlook and limited appetite for lending against secondary quality illiquid assets” create significant challenges for refinancing. The portfolio contained “pockets of material obsolence risk,” it said, citing increased hybrid work reducing demand among potential tenants.

The bonds were divided into seven classes, with Fitch now assigning the top tranche a AA+ rating. Just one, class E, was in junk territory with a B+ rating.

The loan was originated by Citigroup Inc. and Morgan Stanley and, at the time of the downgrade, was secured against 45 properties in Finland, according to Fitch, which added that €297.1 million of the senior loan remained outstanding.

Property values are dropping in Europe as rising interest rates put off buyers until a clearer picture about how far rates will rise emerges. That’s led to wide gaps between bids and offers, crimping deal volumes and putting pressure on owners with loans that are maturing. About a third of all loans in commercial-mortgage backed securities maturing in 2023 and 2024 face high refinancing risks, according to a study published by Scope Ratings in January.

Concerns about how far values could fall are encouraging lenders to push for sales more quickly, while borrowers would prefer more time to seek higher offers for their properties. The drop in prices has so far not led to widespread credit losses, so some creditors are betting that rapid sales can still ensure debt is fully repaid.

--With assistance from Leo Laikola and Thomas Hall.

This article was provided by Bloomberg News.