• Debt still driving deals

News last week that West LB was marketing a portfolio of loans backed by hotels and that MWB had successfully agreed a sale-and-leaseback for four hotels has indicated that the deal logjam does at last seem to be moving.

Driving the change are the debt providers as they get to grips with their portfolios and start looking to move forward rather than sit on their hands.

At West LB, the group is reported to have put a portfolio of 10 leisure loans backed by a collection of hotel and resorts on the market. The bank's debt has a face value of around $342m, although commentators have suggested that the package may only raise between 60c and 70c in the dollar. Some of the loans are part of a syndicate, which is expected to make a sale harder.

Analysts commenting in the Wall Street Journal suggested that the bank many have bitten off more than it could chew by backing investments in resorts as well as the urban markets in which it had more knowledge. The decision is not thought to represent an exit from the sector by the bank, but a chance to rationalise its hotel holdings.

MWB, meanwhile, has exchanged contracts on the long-awaited sale-and-leaseback of four Malmaison hotels for £86.8m. The proceeds from the sale of the hotels in London, Birmingham, Newcastle and Manchester, will be used to cut debt. The London property has been sold to DEKA Immobilien whilst the other three properties are being sold to Legal and General Property.

Following the transactions Malmaison will retain what it described as its "robust" asset backing, with 80% of its 26-stong Malmaison and Hotel du Vin branded hotel portfolio being freehold or long leasehold.

The improved trading fundamentals in the developed markets where large loans were secured to drive costly expansion has been one factor in the recent increase in deals, aided by more available funding. The desire to cut the debt on balance sheets has certainly motivated banks, with Lloyds Banking Group one of the key movers in the hotel sector – as Mint Hotels, amongst others, has recently found.


HA Perspective: Commentators talking to Hotel Analyst have suggested that a further reason for the recent flurry of deals in the traditionally quiet summer season may be the growing concerns over sovereign debt in the Eurozone. It is argued that with a series of controlled defaults looking increasingly likely, there is a feeling that the window of opportunity to seal a transaction may be closing.

There may be a grain of truth in these arguments but given the huge uncertainty about the outcomes of either the US debt crisis or the Eurozone travails and the timeline on which any outcome might be reached, it seems doubtful that this is a key driver.

Both the US debt crisis and the Eurozone problems are essentially political in that they will only be resolved by political will. In the case of the US, the near term crisis is largely artificial in that politics has created the debt ceiling and politicians will somehow work out a short-term fix to keep the country going. Whether these same politicians are capable of fixing the long-term deficit issue is another point entirely.

In the Eurozone, Germany has the capacity to fix the problems if it has the political will. To dig deep enough into the pockets of German taxpayers to end the crisis will require some form of transfer of fiscal powers to European rather than national control. A sort of debt for sovereignty swap.

Nobody doing hotel deals in the current market can realistically hope to have factored in such variables. The different possible outcomes are simply too extreme.

What must happen is that deal principals must focus on the numbers generated by the businesses concerned and reasonable guestimates on the prospects going forward must be made. Debt financiers are collectively realising that the period for panicking about the world ending is over and it is now time to get on with living.

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