Will 2014 be the year that the hotel sector's problem debts will be released, with losses acknowledged, properties and debts sold on?
While many in the sector hope so, others point to those hopes being dashed in the spring of 2012 and 2013, as high expectations led to little substantive action on the part of banks.
Already this year, however, the omens are good. In just the second week of the year came news that the IBRC, Ireland's bad bank, is in talks alongside fellow debtor Bank of Ireland to sell the debt it is holding against the Shelbourne hotel in Dublin. According to a report by Bloomberg, investor Kennedy-Wilson is in prime position to spend around USD158m buying out the Shelbourne's debts.
Such activity gives belief to the affirmations that European banks must start selling off problematic debts and loans. The European Central Bank is starting a process of testing the balance sheets of banks across the European Union, and will assume supervision of lenders later this year. A reckoning by RBS suggests European banks will need to dispose of EUR3.2 trillion off their balance sheets, to meet Basel III regulations in 2018.
Last autumn, a report by consultants PwC suggested non-performing loans across the EU totalled more than EUR1.2 trillion. With EUR100bn added in the previous 12 months, it is expected more skeletons will emerge from the closet in the near future. Faced with these figures, banks have to start clearing out their problem loans and properties.
In the UK, RBS and Lloyds have already started acting. Lloyds recently sold the Menzies portfolio, along with another tranche of problem debts against hotel assets; while RBS is creating an internal bad bank, to handle non-performers.
Elsewhere, in Italy, around EUR30bn of non-performing debt is expected to be sold over the next four years, suggests a recent Reuters report. Analysts expect the market for non-performing loans to liven up during the first half of 2014. Italian banks have bad loans totalling 7.8% of their loan book, according to the Bank of Italy, in contrast with a figure of 12.7% in Spain, as measured last September.
Austrian bank Hypo Alpe is another major group now getting its house in order. Bailed out by state aid in 2009, it has committed to setting up a bad bank to look after around EUR18bn of problem assets and loans. Among its holdings are many assets in the former Yugoslavia, including the Le Meridien hotel in Lav, in Split, Croatia. The hotel, whose owners defaulted on payments of around EUR50m of loans, is expected to be sold this year.
The Shelbourne is yet another example of the exuberance of Irish dealmaking. In 2004, Allied Irish and Bank of Ireland between them lent more than EUR200m to a group of Irish investors, who bought the historic Shelbourne and refurbished it. While valued at EUR247m in the heady days of 2007, by 2011 the property had slipped back to a current market value of EUR86.5m. The 265 room Shelbourne runs under Marriott’s Renaissance flag, under which it is expected to continue to trade.
Kennedy-Wilson has indicated in a public filing that it will be sharing the deal: “We anticipate financing this acquisition with approximately 50% debt and potentially in part with third party equity.”
According to an annual market review by consultants PwC and the Urban Land Institute, Dublin is now noted as one of property’s hottest investment markets, just two years after it was considered a no go area. Such news will surely give Kennedy-Wilson comfort that their new asset will deliver. The turnaround should also show other European banking markets that some swift, decisive action similar to that taken by the Irish government, will soon deliver a positive result.
HA Perspective: [by Katherine Doggrell] Ireland is one of the countries currently being held up as an example of how to step up and fly right. This month saw the first sale of a government bond since leaving the bail-out programme. It was almost four-times oversubscribed, with a yield below 3.5%, against the close-to-14% cost of borrowing the country faced at the height of its traumas.
By facing up to its issues, it is now on the road to resolving them and investors are attracted not only by some healthy bargains, but also by the strong trading future the country has. It doesn't hurt to have a tax regime which can lure in the likes of Google either.
The question of debt and where to get it is likely to remain a difficult one this year as the banks' enthusiasm for the sector has not yet matched the current enthusiasm of the sector for deals and, having suffered in the past and mindful of Basel III, they are not leaping in. This led to a certain increase in imagination last year, with alternate sources such as the bond markets (Meliá Hotels International) and, in the US, taking the IPO route (Blackstone Group clearing the decks). There was even talk of crowdfunding (CityHub in the Netherlands).
For those who like their lending spicy, the return of securitisation was seen last year in the wider market, with more expected this year. While this could help banks lend more, it is likely that the hotel sector, mindful of past escapades, will look to keep things simple for the near future.