Collapse of Eagle Hospitality Trust warrants probe, regulatory reviews

SINCE its initial public offering (IPO) in May last year, Eagle Hospitality Trust (EHT) has not distributed a single cent to investors and lost more than 80 per cent of its market value.

Trading in its units has been suspended, and it is now trying to repay a US$341 million loan - a sum that is nearly three times its market value of US$120 million.

As the authorities now begin looking into what went wrong at EHT, they should not confine themselves to determining if any rules had been broken or whether some industry "best practices" had not been followed. They should consider whether everyone - or, indeed, anyone - was looking out for investors and the long-term viability of EHT.

In particular, the decision to allow Frank, Norbert and Jerome Yuan to buy a combined 33.4 per cent stake in EHT during the IPO was a serious lapse that ought to be investigated. The Yuans run a firm called ASAP Holdings, which sold the six hotels to EHT's sponsor Urban Commons (UC) just before the IPO.

On the face of it, there was no requirement for this to have been disclosed in EHT's prospectus, or for a moratorium to be have been placed on the units that the Yuans purchased at the IPO. Yet, it seems very unlikely that nobody involved with EHT's IPO knew of the Yuans or ASAP Holdings, or understood how it would all look if the information got out.

If the long-term credibility of EHT to investors mattered, then allowing the Yuans to participate in the IPO in such a big way was a remarkable risk to take. As it happened, the information did come to light late last year, as EHT's market price was tanking and the Yuans were selling, which panicked the whole market. The Yuans have since cut their stake in EHT to less than 5 per cent.

There should also be close scrutiny of the due diligence work done on UC and its ability to meet its obligations as master lessee of EHT's properties. Last month, EHT revealed that UC had reneged on its rent payments. This led to EHT's bankers demanding immediate repayment of a US$341 million loan, which forced EHT to nix its first dividend payment to investors and suspend trading in its units.

It also came to light that UC had not provided EHT with a security deposit totalling US$43.7 million, consisting of US$23.7 million in cash and a letter of credit for US$20 million, as detailed in EHT's prospectus. Instead, UC had provided EHT with US$28.7 million in cash and an "executed term sheet" for a letter of credit for the balance of the required security deposit.

Why did EHT accept the revised security deposit terms? What legal advice did EHT seek and receive on the matter? Does UC now have the financial resources to top up the security deposit?

As for the regulators themselves, perhaps they could have done some things differently too. For instance, EHT's decision to include the Queen Mary in its portfolio ought to have triggered a review by the Listings Advisory Committee.

At the very least, that might have led to a thorough examination of the potential repair costs for the vessel before the IPO, and averted the uncertainty that caused EHT's already weakening market price to suddenly crater in October, setting off a whole chain of events that led us to where we are now.