Eagle Hosp gets US$35m loan default notice; hotel managers may scrap sponsor's agreements

THE managers of Eagle Hospitality Trust (EHT) on Friday said they have received a notice of default and demand for payment in relation to another loan, while also disclosing that some of its hotel managers have served its sponsor with termination notices.

Under a US$35 million mortgage loan, the lender Wells Fargo National Association sent an April 18 notice identifying multiple events of default. Wells Fargo had provided the loan on May 21, 2019, in respect of Delta Hotels by Marriott Woodbridge, one of EHT's 18 hotels.

The events of defaults included the non-payment by the borrower - one of Eagle Hospitality Reit's (EH-Reit) subsidiaries - of several sums for the month of March 2020 which were due on April 1, 2020. EH-Reit is one part of stapled hospitality group EHT.

These unpaid sums are: the monthly interest accrued on the loan and the respective principal amount of the loan; the monthly real estate tax deposit; and the monthly deposit for the costs and expenses to replace and maintain furniture, furnishings and fixtures at the Delta Woodbridge hotel.

Wells Fargo has exercised its right to cause the loan to bear interest at the default rate calculated from April 1, 2020, and also demanded the payment in full of all amounts currently due and payable under the mortgage loan.

HOTEL MANAGEMENT DEFAULTS

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Meanwhile, the master lessees - under EHT sponsor Urban Commons - for 16 out of EHT's 18 hotels have received notices of default from the relevant hotel managers under their hotel management agreements (HMAs).

This was because the master lessees did not provide and/or maintain sufficient working capital for the hotels' operations. There were also additional defaults resulting from their failure to pay management fees and/or to make funds available to pay hotel operating expenses.

The 16 hotels include The Queen Mary Long Beach, The Westin Sacramento and Sheraton Pasadena. Delta Woodbridge is not among them.

In addition, of the 16, five hotel managers have also sent termination notices dated April 16 to the respective master lessees under their HMAs, after the master lessees failed to cure their default of maintaining sufficient working capital for the hotels' operations.

If the five master lessees do not cure the defaults within the applicable cure periods, the hotel managers will terminate their HMAs.

The EHT managers said on Friday that they are confident the inherent value of the properties in EHT's portfolio is not significantly affected by the master lessees' alleged defaults.

The managers are "working hard towards preserving the value of the properties in these difficult circumstances".

If true, the alleged defaults under the HMAs would also constitute a breach of the respective master lease agreements (MLA) by the master lessees. The MLAs were entered into with the master lessors - EH-Reit subsidiaries that own each underlying EHT property.

In the meantime, the master lessors reserve all rights against the master lessees under the MLA, and the master lessees remain obliged to fulfil their obligations under the MLA.

RESTRUCTURING

The managers and DBS Trustee, as EH-Reit's trustee, have also appointed FTI Consulting to assist in the restructuring process for EHT.

As part of the appointment, FTI's Alan Tantleff and Nicholas Gronow were named joint chief restructuring officers of the EHT managers, covering the US and Singapore respectively.

FTI will continue negotiations with the syndicate lenders of a US$341 million loan with a view to restructuring the relevant debt facilities. The managers had disclosed on March 24 that they received a demand for the immediate repayment of EHT's US$341 million loan from Bank of America, the administrative agent for the syndicate of lenders.

The advisory firm will also evaluate the strategies to be undertaken to preserve the value of EHT's portfolio for the benefit of stapled securityholders, particularly amid the Covid-19 pandemic, and having regard to the master lessees' defaults under the HMA notices.

To determine the viability of the MLA, FTI will evaluate income, expenses, cash and profitability at the master lessee level.

FTI will also evaluate the unpaid rent by the master lessees to EHT, as well as the impact on the property portfolio from the master lesses' further defaults in relation to the HMA default notices and the potential termination of the HMAs.

The managers and DBS Trustee, with the assistance of the FTI chief restructuring officers and legal counsel, are assessing the impact of the alleged defaults, as well as the Covid-19 crisis in the US on the operations of the underlying properties. They are also looking into the appropriate steps to manage and minimise the consequent risks.

As such, it is too early to ascertain the full financial impact on EHT, the managers said on Friday.

The EHT managers are also assessing the appropriateness of the MLA structure as part of the strategic review as announced on March 24. As part of these deliberations, they will take into account the content of the default and termination notices from the hotel managers as well as the financial soundness of the master lessees.

As for the Wells Fargo notice for the US$35 million mortgage loan, the managers are assessing the implications and have been in discussions with the lender.

Stapled securities of EHT have been voluntarily suspended since March 24.

Read more: EHT's sponsor dogged by payment disputes