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Eagle Hospitality Trust's lenders restrict bank accounts of Reit, lessees
THE syndicate of lenders for Eagle Hospitality Trust’s (EHT) US$341 million loan has restricted access to several bank accounts of Eagle Hospitality Real Estate Investment Trust’s (EH-Reit) subsidiaries and the Reit's master lessees.
This comes a month after EHT - a stapled group comprising EH-Reit and Eagle Hospitality Business Trust - received a notice of default and acceleration from Bank of America (BofA), the administrative agent for the syndicate lenders, for the loan.
An event of default had occurred due to master lessees’ non-payment of rent to EHT under the master lease agreements (MLAs) for certain EHT properties. The master lessors under the MLAs are the EH-Reit subsidiaries that directly own each EHT property.
On Monday, EHT’s managers said access to the bank accounts were restricted as the lenders are asserting their rights and remedies after issuing the notice of default.
They restricted access to: the rent collection accounts, which are deposit accounts in the name of the master lessors that own the relevant properties; the master lessors’ bank accounts that hold the security deposits (SDs) received in cash under the MLAs; the revenue collection accounts of the respective master lessees; and certain general business accounts in the name of borrowers, which are EH-Reit subsidiaries, under the facilities agreement for the syndicated loan.
These bank accounts had been provided as collateral for the US$341 million loan.
The EHT managers have also delayed the maiden distribution to stapled security holders as a result of the notice of default. On Monday, they reiterated that there are sufficient funds in EHT’s bank account - held with DBS Bank (Hong Kong Limited) - to pay the distribution in full, although the notice of default restricts them from doing so.
The managers have also instructed DBS Bank (Hong Kong Limited) not to cause or permit any withdrawals or transfers from the distribution bank account, while discussions are ongoing with BofA and the lenders during the temporary forbearance period.
On Monday, the managers also responded to the Singapore Exchange’s queries regarding the SDs and the subsequent “delinquencies” in rent payment in the recent months of 2020.
The fixed rent for the months of January, February and March 2020 - which were due in February, March and April respectively - have not been paid, the managers said on Monday. The variable rent for the first quarter of 2020, due in April, is also unpaid.
“The managers have been following up actively on these rental delinquencies, including consulting counsels on legal rights and remedies and appropriate exercise thereof,” they noted.
After a grace period of five business days, any non-payment of rent will constitute an event of default under the MLAs, in which case the master lessors may exercise remedies including terminating the MLAs by giving the master lessees at least 10 days’ written notice.
The EHT managers clarified on Monday that they have not extended the deadline for the payment of fixed rent for the months of January and February.
The managers said they engaged both EHT’s sponsor, Urban Commons, and the master lessees “actively” in demands for these outstanding amounts throughout January and February. In response, the sponsor and the master lessees “consistently reassured” that the January and February rents would be imminently paid.
On March 17, the master lessors sent a notice letter to the master lessees reiterating the non-payment of rent and that they intended to apply the SDs to satisfy payment of the overdue rent.
The master lessees said they were unable to pay rent because of “certain third-party property-level receivables”, coupled with the Covid-19 pandemic’s impact. January, as a seasonally weaker month, also did not generate enough cash flow to make the rent payment, the master lessees added.
On April 1, the EHT managers sent a follow-up letter to the March 17 notice, requiring the master lessees to provide additional financial information including details to support their assertions about their inability to pay rent.
The managers assessed that EHT’s portfolio performance for January was less than the rent due to the paid for that month. They thus also requested supplemental financial information from the master lessees on this.
External financial advisers will assist the managers in assessing the master lesses’ ability to meet their rent obligations moving forward, including the extent of the impact of the coronavirus outbreak on their ability to do so.
SECURITY DEPOSITS: LETTERS OF CREDIT
For the payment of the outstanding amount of the SDs, the master lessees were required to obtain letters of credit (LCs) and counter-standby LCs from UBS AG Singapore Branch, as stated on page 404 of EHT’s initial public offering prospectus.
The EHT managers clarified that they have not given approvals for the master lessees to not obtain the LCs and counter-standby LCs from UBS’s Singapore branch. However, after the master lessees failed to obtain such LCs from UBS, the managers had to consider LCs issued by a different bank.
The master lessees sought to secure LCs from an alternative bank, on their own accord. They then submitted an LC for review by the managers’ lawyers shortly after the listing date, but this draft was found to not satisfy the required criteria.
EHT’s managers thus notified the master lessees in a letter dated June 24, 2019 of their failure to comply with the SDs requirement, and the master lessees had up to 180 days to cure their failure to pay the balance of the SDs.
During this cure period, the master lessees tried to secure an LC from California’s Bank of the West (BOTW), a wholly-owned subsidiary of BNP Paribas. BOTW is also an existing lender to EHT under the US$341 million loan.
BOTW provided a term sheet for an LC to the master lessees on July 22, 2019, subject to the approval of the bank’s internal committee. This approval process suffered administrative delays on the part of BOTW, which were not attributable to credit issues, the EHT managers said.
There were further delays later because BOTW had to conduct additional due diligence, after EHT was featured in adverse media reports.
Throughout the cure period, the master lessees gave consistent assurances that the LC would be forthcoming, and the EHT managers routinely followed up with them.
As the cure period was expiring in December 2019, the master lessees requested to extend it and said they fully expected to obtain the LC approval by mid-February 2020. Both the audit and risk committee and the EH-Reit manager’s board thus gave a 60-day extension - seeing as the master lessees had already paid a substantial portion of the SDs in cash and had been making rental payments at that time.
On Feb 6, the master lessees asked for another extension because the documentation and finalisation of the LC was still ongoing. A second extension was then granted to June 8.
One of the reasons for the audit and risk committee and the EH-Reit manager providing the second extension was that the master lessees had agreed to provide a further US$5 million in cash, as a precondition to the second extension. This would increase the aggregate SDs received and undrawn to about US$28.7 million, representing 5.9 months of fixed rent.
Moreover, without the second extension, there could have been a technical default triggered under the syndicated loan, which would likely be more prejudicial to the interests of EHT’s stapled security holders, the managers said on Monday.
Both the first and second extensions of the LC due date were also approved by BofA and the syndicate lenders, including BOTW.
Meanwhile, EH-Reit’s trustee, DBS Trustee, said it consented to both extensions partly because EH–Reit was a new Reit and needed time for its teams to work out “operational kinks”, seeing as it held 18 hotels in multiple US states. And while there were delays in receiving the monthly fixed rents for 2019, these rents were eventually paid, DBS Trustee added.
Asked by SGX whether it had considered the financial resources of Urban Commons or the master lessees before giving such consent, DBS Trustee said it did not. The trustee noted that its concerns were first on preserving the MLAs, which were an essential feature of EHT's structure.
After the Reit has some time and space to procure the master lessees' performance of the MLAs, other factors such as the latter's financial resources "can then be properly considered in the context of assessing the mid to long-term future of the MLAs", DBS Trustee said in the bourse filing.
Trading in EHT stapled securities has been suspended since March 24, 2020.