Debt is continuing to be the critical factor for distress situations in the US and has led to a number of single asset and portfolio hotel deals being struck in the past couple of years.
In Europe, however, despite similar levels of distress, there has been hardly any transactions taking place. Lenders are adopting different approaches according to the territory with the same bank choosing to exit a distress situation at a loss in the US while hanging on in Europe.
The most recent US deal involves the Mark in New York. Dune Real Estate Partners is reported to have acquired the $300m mortgage on the Mark for $190m, giving it control of the property. Dune will work with developer Alexico Group to continue repositioning the hotel property. Alexico has spent around $200m renovating the Mark, but ran into difficulties over stalled sales of residential units it had developed on the site.
Blackstone Group and Square Mile Capital are reported to have agreed to buy mortgages worth around $385m linked to 45 hotels, from the US Federal Deposit Insurance Corporation. The pair will pay about 80 cents on the dollar for the portfolio, through a joint venture, according to The Wall Street Journal, which was felt to be a relatively high price compared with deals involving distressed debt backed by hotels done earlier in the downturn, indicating increasing optimism in the sector.
Both that deal and that to take control of the Mark involved banks under pressure – the failed Silverton bank in the US and Anglo Irish Bank, respectively – and have seen the debt acquired at a discount, indicating that the merry-go-round of pain is finding a home, in this case with the previous lender. AIB financed several Alexico projects during the boom, but last year sold loans for the group’s Alex Hotel and Flatotel.
This is not the first such deal for Blackstone, which, at the end of last year took ownership of 14 hotels it had previously sold to Columbia Sussex five years ago, through acquiring the junior debt on the sites.
For the new owners of the debt, it is not the detached process of dealing debt that helped to set up the position the wider financial market finds itself in, one which those with cash are able to take advantage of. The new owners are faced with real assets which must be made to work and assessed for flaws underlying what may just be over-leverage as a product of the cycle’s frothy peak.
The Irish Times reports that, at the Mark, AIB is being sued by Alexico, which claims that the bank breached a series of agreements relating to $500m of loans that it made to redevelop the Mark, Alex and Flatotel. The developer has argued that the bank should not sell on the loans and it is not known if the deal with Dune will see this case dropped.
HA Perspective: The different approach adopted in the US compared to Europe is at first sight puzzling. Taking a write-down in the US hurts the balance sheet of banks just as much as it does in Europe.
But there are complexities. The bankruptcy process in many European jurisdictions is far from clear cut and political pressure can be a significant deterrent. Banks, having been bailed out either directly or indirectly by governments, are reluctant to be seen shutting down businesses.
Just as importantly, the European business culture does not so readily accept failure as the US. A failed business venture in Europe often taints those who originally backed it rather than being seen as an unfortunate and occasional side effect of taking risk.
Distressed loans in Europe will have to be sorted out eventually. It seems that the preference is to do things quietly.