• Red Roof default is a another test

Red Roof, the US economy hotel chain unloaded by Accor in 2007 for $1.3bn, has defaulted on debt with a face value of $367m.

The move has highlighted the depth of problems within hotel property as the company has entered into discussions to restructure the delinquent debt which is secured on 113 of its 345 units.

A statement by Red Roof said it was profitable on an operating basis but it believed a debt "modification" was the best way to see it through the downturn.

Citigroup has a 79% stake in Red Roof via its Global Special Situations Unit. Other investors include Westmont and Westbridge Hospitality Fund II. While the $367m of delinquent debt has been securitised, there is a further tranche of $655m not securitized and another $164m comprising mezzanine.

The rate of default of securitised hotel debt has risen to 5% in June this year against 0.55% in the same month a year ago, according to consultancy Trepp quoted in a report in the Wall Street Journal.


HA Perspective: The US continues to be the testing ground on what the recovery will look like. For many owners of mortgage debt, it does not look pretty.

Hotel operators, by and large, look relatively robust. A number of REITs, having recapitalised, also now look OK.

For people holding mortgage paper on the hotel properties in these businesses, however, there seems set to be a lot more pain.

The REITs have shown themselves willing to abandon leases that have been struck at unviable rates. Either loans are restructured on more favourable terms or lenders will be handed back the keys.

This is a message that is heading across the Atlantic, albeit in slightly different business structures and approaches. A case of work out or walk out.

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