The Royal Bank of Scotland appointed Ernst & Young in late June as receivers to its group of 42 Marriott hotels after the bank failed to restructure the loan made to finance the £1.06bn deal to sell the sites in 2007.
The news came as a surprise to many observers, but has come as a further indication that the era of ‘pretend and extend' is coming to an end as banks take the decision to act, with the move taken shortly after the Von Essen Hotels portfolio came to market.
The 2007 deal saw RBS take on around £700m of the £856.1m debt borrowed against the assets, which were acquired by a consortium comprising Quinlan Private (now Avestus Capital Partners) with 45% to 50%, Igal Ahouvi with 9.9% and Delek Global Real Estate holding 17%.
There is also a loan originally owned by Lehman Brothers, now held by hedge fund York Capital. Sources close to the situation believe that the majority of the debt should be recoverable through a sale of the assets, although there may be some write-downs.
The initial deal, which was for 47 hotels (five of which were subsequently sold for £50m) was split into the aforementioned £856.1m debt and £202.1m equity, giving a LTV of 81%. It was reported that RBS was entitled to 20% of the profits from any future sale of the hotels excluding an annual 2.5% increase in their value.
It is thought that the 8,456 rooms in the chain were expected to generate an average net income, less expenses, of £78m over the next 10 years. The yield, just shy of 7.4%, did not take into account any increase in capital value of the holding. It is not known what income the hotels have bought in to date.
The sale in 2007 marked a quick turnaround for RBS, indicative of the speed at which the market was operating. The bank had bought 46 of the hotels from a joint venture between Whitbread and Marriott International in the previous April for £951m, paying an additional £30m for a separate hotel.
RBS has been in talks since 2008 to restructure the debt, through a debt-for-equity swap. However, the failure of these talks and the rising level of interest building up against the debt is thought to have precipitated the decision.
According to reports in the Irish press, the action was a surprise to at least one of the parties involved in the deal, with the Irish Times quoting Avestus partner Thomas Dowd as telling clients on the day of the announcement: Since our last update, on 28th April, there have not been any significant developments in respect of the debt restructuring".
Dowd continued: "To date, it appears that RBS has declined to negotiate with the hedge fund which bought out the Lehman debt position. We do not believe that either party will allow the status quo to continue, and we would expect that sooner or later the parties will attempt to move matters forward.
"In recent days, RBS have agreed to a call with the shareholders and we expect this to happen in the coming days, after which we hope the level of engagement may pick up."
In 2007, sentiment seemed to be that the sector was in some way recession-proof and would continue to rise relentlessly, with benefits for all. As figures released in late June by TRI Hospitality Consulting have shown, despite recent improvements in trading fundamentals, profits remain at risk. The beleaguered provincial market is expected to see zero growth in occupancy performance, and a marginal growth of 1% in average room rates, resulting in a 0.9% growth in revpar for this year. In London subdued revenue growth and rising costs mean that TRI is expecting goppar (profit) growth of only 1.1% in the capital.
HA Perspective: At the time of the 2007 Marriott deal, the level of leverage was par for the course in a market where deals were taking weeks rather than months to do. The rising market led to more and more risk being taken by lenders and lower and lower margins.
The behaviour of the lenders reinforced the cycle and since the bust little has been done to prevent something similar happening once the market starts heating up again. While banks like RBS have exited the principal finance businesses that struck the original deal, there seems little that is new in terms of checks and balances to prevent a similar lending frenzy in a few years time.
In the near term, for the 42 Marriotts, the ongoing lack of available bank debt means that it is unlikely that the group will be sold again as a portfolio.
Whether this is indeed the end of pretend and extend is dubious. It is certainly clear that banks are again looking hard at their portfolios but the problem is that bringing everything to market at once will cause an implosion in the property market and they are unlikely to risk this.