Entrepreneur Surinder Arora has lost two of his group’s hotels to US hedge fund Davidson Kempner. And one of those is set to be stripped of its Arora branding, as the hotel has been put up for sale.
The two properties, both at Heathrow airport, were signed over to Davidson Kempner after the investor bought two tranches of debt owed by the Arora hotels business. One, the Hilton, looks set to remain operating under the brand, while the other is currently being offered through agent Christie + Co as an unbranded opportunity, with an expectation of receiving offers of around GBP45m for the property.
Davidson Kempner made its first move in 2013, when it was top bidder for Project River, a GBP200m bundle of seven syndicated loans secured against Arora’s airport hotel portfolio. The package was put up for sale by Citigroup on behalf of AIB; as well as syndication issues, the funding package included interest rate swaps with potentially costly consequences. The hedge fund outbid rivals including Cerberus, Apollo and KKR and is understood to have paid around GBP140m for the package. Arora himself put together a team and bid for the debt, in conjunction with investor Richard Caring and hedge fund veteran Stanley Fink.
The debt was just one slice of a large volume of borrowings used by Arora to grow his business, which in mid 2013 was estimated to stand at around GBP500m in total. The Arora books also showed interest rate swaps estimated to have a value of around GBP200m, according to media reports. While the debts were large, Arora had always met the interest payments on its loans, and had found no problem negotiating refinancing agreements.
As it won the Arora loans, Davidson Kempner hired former Starwood Capital distressed debt specialist Romain Ferron to join its team. The hedge fund then subsequently canvassed other lenders, and according to the London Times, agreed terms to buy in further Arora debt held by HSBC. Arora has called the HSBC move “shocking”, but it gave Davidson Kempner a stronger position to argue their corner and push to take over assets in place of the debt.
Surinder Arora’s story is that of an entrepreneur who made good in the UK. Born in the Punjab, he arrived in Britain as a teenager, and started work in British Airways and on shifts at Heathrow’s hotels: he used to wait on tables at the Renaissance, a hotel he subsequently bought. His first venture into the accommodation business was when the family bought a row of houses at Heathrow, which were turned into bed and breakfast accommodation for flight crews. At the height of his business, he was named in the Sunday Times Rich List as having a GBP356m fortune, with stakes in other businesses such as Wentworth golf course.
Arora founded his hotels business in 1999, and with a background working at British Airways and financial group Abbey Life, opted to invest around UK airports. In addition to building and managing hotels, the company subsequently involved itself in development of hotels.
The Arora portfolio currently lists eight hotels, of which three are Arora branded. The group also runs properties under international franchised brands, including the Sofitel branded Heathrow and Gatwick, run under franchise agreements with Accor, the Renaissance Heathrow under franchise from Marriott and the Holiday Inn at Heathrow Terminal 5, franchised from IHG. The latter property was a rebrand during autumn 2014, a year in which Arora also acquired the Savill Court Hotel and Spa in Windsor.
Development activity was spurred on by agreements to design and construct five budget hotels at Heathrow, Gatwick, Stansted and Aberdeen airports, with the first opening in 2012. More recently, Arora has developed a Premier Inn at Gatwick airport’s north terminal. And the company is working to complete a 453 room InterContinental in south east London, adjacent to the O2 entertainment centre, which it will own and operate. The hotel is due to open in late 2015 and will run under a franchise agreement.
HA Perspective [by Chris Bown]: The complexity of Arora’s loans illustrates just how financiers started to tie regular business people in knots, in the heady days of the last decade. Arora built a portfolio of airport hotels that are fundamentally good businesses, yet it was constructed using a substantial volume of debt, stapled to complex instruments such as rate swaps; no problem with that, and Arora has always been able to service, and refinance, that debt along the way.
However, Arora was tripped up not because it had a problem, but because its bank had a problem: and because its highly complex, and highly leveraged loans were perceived as distressed debt, when the Allied Irish loan book was given a good look over.
In retrospect, it is easy to view the discounted sale of the Arora debt as a knee jerk over-reaction, and Davidson Kempner the lucky recipients of that decision. However, the fact that Arora itself was outbid suggests the company could see complexity and problems down the road with its own loan structures.
With Davidson Kempner out of his business, Arora will now need to concentrate on ensuring that none of his other lenders feel the need to sell on their Arora loans. And, if the hedge fund receives several strong bids for the hotel they are selling, then perhaps Arora should contemplate a profitable sale of one of his remaining airport hotel assets, to the underbidder.
With the new London 02 InterContinental coming on stream, Arora will soon have something to celebrate. Don’t be surprised to see this redoubtable character putting another hotel development deal together, sometime soon.
[Additional comment by Andrew Sangster]: The old joke runs that banks will only lend you an umbrella when the sun shines and then they take it away again during a heavy down pour.
Behind the humour there is a real issue here in terms of how debt financiers behave. It seems to make little sense, for example, that as soon as a borrower gets into trouble with a loan they are handed over to a part of the bank that has not previously known either the borrower or the business.
The relationship director that made the loan is whisked away to be replaced by a hard-headed financier focused on yielding the best short-term result for the bank. Why? Is the relationship director not capable of being hard-headed? If they are capable of making the decision to lend the money in the first place, surely they should be involved in the recovery process as well.
The same credit committee and controls used to lend the money can be invoked with any rescue plan. And the relationship director, the person within the bank who understands the borrower the best, should be involved in this process.
Unfortunately, the lending banks do not seem to have changed their pro-cyclical ways. They lend money at the worst time in the cycle, near the peak, and take away the ball during the recession. Study after study shows that bank lending picks up after a recovery and not before. The sensible lenders would be out there earlier, getting the higher margins and safest bets.
Right now we hear whining from lenders that their margins are nearly non-existent thanks to the onslaught of competition. So far, most have stood firm in not lending at excessive multiples of EBITDA and / or loan to value. In the wake of the margin compression, how much longer before the banks start bending these restrictions to extract a little more margin?