• Lloyds’ moves offer little hope for vultures

Behind the scenes shuffling at Lloyds, the UK lender that has the biggest portfolio of troubled hotel loans, suggest it is less and less likely that there will be a flood of distressed hotel assets entering the market.

Rather than pull the plug on difficult loans, the bank is seeking to restructure and, in most cases, pursue an orderly exit.

The latest hotelier to be restructured is Rocco Forte Hotels, where it has received a £300m to shore it up after breaching covenants. Of course, this largesse does not come without a price, and in Forte's case it is higher interest rates and an extension of just 18 months.

According to a report in The Times, the main problem had been in the joint venture vehicle between HBoS and Rocco Forte which covers seven of the group's 13 hotels. The JV had breached some key financial covenants and has been restructured with £200m of the £300m. The remaining £100m has been put into the main vehicle as the two were viewed as being inextricably linked.

Another big HBoS loan under pressure is that with the Alternative Hotel Group. This operation, which has Richard Balfour-Lynn at the helm, is currently in restructuring talks. Andrew Coppel, who oversaw the rehabilitation of Queens Moat Houses, is tipped to become a non-executive director following the agreement of any deal.

Marylebone Warwick Balfour, the listed company that is also heavily backed by HBoS, is currently marketing a couple of its hotels in Scotland, the Malmaison in Edinburgh and a property in St Andrews.

MWB held a share placing just before Christmas to raise £27.5m (at a discount to the prevailing share price of a third) and has trimmed nearly £10m from its costs by measures that include reducing the number of executive directors to three from four and cutting the pay of those that remain by 60%. The non-executives are also having their fees reduced.


HA Perspective: Analysts at Merrill Lynch identified three hurdles for banks to normalise their debts: a rise in interest rates choking cashflow; the size of the refinancing for commercial real estate estimated at £120bn over the coming years (research by De Montfort University estimates that the next three years will require £30bn each year to refinance); and finally the fact that banks have made inadequate provision for non-performing loans.

Each of these fears is dismissed by the analysts. Rising real interest rates have historically never been a big cause of loan default for corporates and the impact is easily counterweighted by an improvement in GDP.

The refinancing issue is likely to be overcome thanks to a gradual recovery in values and the willingness of banks to rollover maturing loans. The property derivatives market now shows that investors expect values to increase this year compared to expectations last year of ongoing falls in 2010.

The previously expected loss rates which might have exceeded 25% now look set, according to Merrill Lynch's banking analysts, to be well below this level. Lloyds has already written down its losses on commercial real estate by an estimated 21% which Merrill's described as aggressive enough.

The Merrill Lynch team are on the optimistic end of consensus forecasts but their outlook is not unreasonable and should give considerable hope for an orderly exit from the current turmoil.

If you are a vulture fund you will need to look at the notes from more pessimistic banking analysts. But even these are becoming more cheerful as the recovery progresses.

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