Bonds of iStar Financial Inc. have surged to the highest levels in almost two years as the commercial real estate lender renegotiates $3.9 billion of debt maturing through next year.

The New York company's $508.7 million of 8.625% notes due in 2013 have more than tripled to 87.75 cents on the dollar from 28 cents in March 2009, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The cost to protect against its debt defaulting has declined to the lowest level since July 2008, according to CMA DataVision.

The debt rally, fueled by improving credit markets and increased access to capital for finance companies, may be overdone given almost half of iStar's assets are nonperforming, said Adam Steer, a debt analyst at CreditSights Inc.

"The company lacks a viable business model right now," he said. "Banks will determine the endgame," rather than bondholders.

IStar, which provides loans to real estate investors ranging from the California Public Employees' Retirement System to Vornado Realty Trust, was planning to explore selling assets before approaching its banks regarding the 2011 loans, Jay Sugarman, iStar's chairman and chief executive, said in February.

Andrew Backman, the head of investor relations for iStar, did not respond to telephone messages or e-mail requests.

IStar has more than $7 billion of loans maturing through 2012, including $3.9 billion of bank debt coming due by June 28, 2011. Bank of America Corp. and JPMorgan Chase & Co. helped arrange the loan. The company also has $2.55 billion of bonds maturing through 2012.

"The pending negotiation with the bank group is a key item to monitor as the company requires added flexibility in terms of addressing its 2011 debt maturities," said analyst Michael Kim, senior vice president at CRT Capital Group in Stamford, Conn.

The banks may extend the debt, which would give iStar time to market some of its better assets and stave off restructuring, he said.

"IStar's banks are incentivized to work with the company because there is a large amount of commercial real estate that would be assumed in any balance sheet restructuring," Kim said.

IStar's debt was cut to below investment grade by Moody's Investors Service in September 2008.

Nonperforming assets are 42.7% of the portfolio and $718 million more, or 7.7% of loans, are on a watch list that could enter nonperforming status, Steer said.

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