Hotel Owners Paying Higher Rates To Change Loan Terms

HOTEL OWNERS PAYING HIGHER RATES TO CHANGE LOAN TERMS

Jeannine DeFoe, Bloomberg News

New York


The day after the Sept. 11 attacks, FelCor Lodging Trust Inc. Chief Executive Tom Corcoran was on the phone with his bankers renegotiating loans.

Eight weeks later, J.P. Morgan Chase & Co., Deutsche Bank AG and 10 other lenders are charging the owner of Holiday Inns and Embassy Suites hotels up to $7.7 million a year more in interest for amending a $615 million credit line to let FelCor carry more debt relative to net worth without triggering a default.

The company must pay the price -- "protection in case things continue to be negative" -- to ride out the hotel industry's worst slump in 34 years, Corcoran said.

Like FelCor Lodging, Hilton Hotels Corp., Host Marriott Corp. and Wyndham International Inc. are among those seeking easier debt- ratio rules and other concessions from lenders as vacancies rise and room rates drop amid the decline in travel. Hotel companies face interest rate increases of as much as 400 basis points for violating loan terms, Wachovia Securities said. "Everybody has talked to their banks," said Howard Silver, president of Equity Inns Inc., a Germantown, Tennessee-based owner of 96 Hampton Inn, Comfort Inn and other hotels.

Starwood Hotels & Resorts Worldwide Inc., the biggest hotel owner, last week said its lenders agreed to modify leverage and interest coverage ratios on a $1.8 billion credit line. The owner of Westin and Sheraton hotels will pay higher interest rates, said spokesman David Matheson. He wouldn't say how much higher.

The number of hotels whose shriveled cash flow will hurt their ability to meet debt payments may rise 75 percent in 2002, said PKF Consulting.

Risk and Reward

Bankers are relaxing loan terms in exchange for higher interest payments. In some cases, banks are gaining a say in how hotel companies spend cash, a move to ward off defaults that would cause lenders to write down asset values.

Even before Sept. 11, banks faced a rising level of bad loans across many industries. The amount of loans at risk of default almost doubled to $192.8 billion last year, according to federal bank regulators.

"It's a game of risk and reward," said Paul Chakmak, a managing director at Canadian Imperial Bank of Commerce who handles hotel loans. "We're riding out the storm with our clients. We understand what happened -- there's been a material change in the market."

The travel decline since the attacks has led to a 7.1 percent drop in revenue per available U.S. hotel room this year, according to PricewaterhouseCoopers -- the worst fall since the consultancy began tracking the industry in 1967. The measure of demand is based on average occupancy and room rate.

'Skin in the Deal'

For all the gloom, industry analysts don't expect a shakeout similar to that of the early 1990s, when overbuilding and a recession led to defaults and foreclosures. Since then, lenders have required borrowers to put up more equity as a condition for agreeing to hotel loans.

"We have a saying for that -- we want more skin in the deal," said John B. Levy, head of a real-estate investment- banking firm that bears his name. " Lenders are taking a much tougher road today than they were in the early 1990s. We want something for something."

On their part, hotel operators that aren't stretched making loan payments can break even with occupancy rates of 54 percent, down from 64 percent in 1990, according to PricewaterhouseCoopers.

FelCor, which called off a deal to buy MeriStar Hospitality Corp. for $2.7 billion after the attacks, was able to raise the maximum leverage ratio under its credit line to 65 percent from 55 percent. At the maximum the company would pay 325 basis points more than the London interbank offered rate, up from 250 basis points under the original terms.

Curbs on Expenditure

Host Marriott, an owner of 125 Marriotts, Four Seasons and other hotels spun off by management company Marriott International Inc. in the 1990s, is talking with lenders about modifying or waiving covenants governing its credit line. The company also said it may suspend the fourth-quarter dividend payment, saving $68 million in cash.

Hilton said in a Securities and Exchange Commission filing it amended covenants setting the leverage ratio and debt service coverage ratio for its credit lines "to provide greater operating flexibility during the softer economic environment in the aftermath of the September 11th terrorist attacks."

Trump Hotels & Casino Resorts Inc.'s Chairman Donald Trump withheld interest payments due on $1.6 billion of the casino company's bonds as he pressed bondholders to renegotiate terms. He paid the $91 million in interest due last week, avoiding default, after a bondholders committee to negotiate with him was formed, Trump said.

Wyndham received a temporary amendment from lenders on $714 million of its debt after promising that all proceeds from hotel sales would be used to lower debt. Dallas-based Wyndham also pledged to spend no more than $85 million on improvements and other capital expenditures at its properties.

Wyndham spokesman Andrew Jordan wouldn't provide details on the amendment. The company and its banks are working to have a permanent amendment in place by the end of February, or risk a default.

"No bank wants to become an inadvertent owner of a hotel," said Steven Kent, an analyst with Goldman, Sachs & Co.