Inside Project Rock: the standalone hotel tranches

IBRC’s Project Rock standalone tranches comprise an outstanding debt of £2.2bn, more than half of which is within five of the 11 separate tranches, which are all secured by UK hotels.

ibrc-logoProject Rock’s five hotel tranches together amount to an unpaid loan balance of £1.325bn, secured by 95 regionally spread UK hotels with a carrying real estate value, predominantly dated to June this year, of £717.2m.

This implies a segregated LTV for the hotel loans of 184.8%.

But this weighted leverage masks a spread of distress among the various hotel companies, and underlying real estate, with some companies likely more attractive purchases than others, and all that does not trade will end up in NAMA.

There is a common thread which runs throughout these loans: high leverage lent by Anglo Irish Bank in the years before the property crash and global financial crisis, predicated on unsustainable growth in either the operating companies’ profitability, or in some cases portfolio expansion.

Hotel companies were hit several times over: fall in tourism, at a time when competition expanded considerably, a rise in food cost inflation, and of course, a fall in property values and collapse in bank finance.

IBRC has completed a number of sensible loan extensions to struggling companies with considerable net liabilities – effectively keeping them in the game – and this may well prove to deliver a better return of their initial capital in the end, whether these trade in the KPMG orchestrated loan portfolio sell-off or not.

Indeed some of these situations carry enough distress to tempt the private equity funds, investment banks and hedge funds.

It comes down to whether bidders can make the number work – or rather forecast a sufficient return on their investment – given the controversial hurdle rates which govern bidders’ pricing on these tranches.


QHotels, the owner and operator of 21 four-star UK–wide hotels, completed a restructuring of its legacy Anglo Irish Bank facilities which helped the company finance its hotel portfolio growth over the last eight years in mid-January.

IBRC extended QHotels’ six outstanding loans – with a combined gross balance of £374.9m – by almost three years to the end of November 2015.

The 21-strong hotel portfolio was valued at the end of July at £292.4m, implying a current LTV of 128.2%, against the outstanding balance. QHotels’ predicament was driven by a £67.8m devaluation of fixed assets in 2012.

The UK-wide hotel portfolio – which includes Midland in Manchester, The Queens in Leeds, Crewe Hall in Cheshire, The Oxford Belfry and The Westerwood Hotel & Golf Resort near Glasgow – is the security pool for a variable rate loan over LIBOR.

The average interest in the 12 months to the end of 2012 was 3.88%.

The Midland in Manchester, valued at £59m, is the most valuable hotel in the portfolio.

As part of the debt restructuring agreement, QHotels Group Limited was placed into administration, which reported net liabilities for 2012, including a turnover of £121.6m and an annual loss of £3.3m.

QHotels Group Limited was replaced by a new holding company to continue to run the business on an on-going basis.

In its annual results dated to 28 March 2013, QHotels company secretary and finance director Ian Goulding wrote that, based on information provided to the directors by their IBRC relationship team and available in the public domain, they “do not believe the bank loan facilities that were extended until 30 November 2015 will be impacted by the special liquidation” of IBRC.

The ultimate controlling parties of QHotels Group Limited are Michael Purtill and Ian Goulding in conjunction with David Chubb and Michael Jervis of PricewaterhouseCoopers, the joint administrators.

Sommerston Hotels

Somerston Hotels, an operator of three-star hotels throughout the UK, has £339.5m of debt outstanding to IBRC across two loans, secured by a 35-strong predominantly Holiday Inn-branded portfolio.

The hotel portfolio, ultimately controlled by Ruth Hudson through Carlton Investment Trust Limited, was valued down by 9%, or £22.8m, to £223.1m by Jones Lang LaSalle at the end of 2012, which reflecting a mix of fortunes for the underlying portfolio’s values.

According to Somerston Hotels 2012 annual results, 17 hotels suffered an aggregate £26.6m decrease in value, while 16 hotels increased by £9.6m. In addition, there were £5.8m in fixtures, fittings and depreciation charges.

Overall, JLL’s 2012 £223.1m valuation implies a 152.2% LTV.

Somerston Hotels also uses IBRC as its bank to run its hotel business, with a record £2.2m in cash held in deposit accounts, £1m in a blocked account (see below) and a further £1.2m in a capex reserve account.

In its results filed with Companies House, dated 5 June 2013, Keith Griffiths, managing director at Somerston Hotels, wrote: “It currently appears that the liquidator is proposing to set-off the deposit amounts against the outstanding loan rather than allow the monies to be released or placed into new accounts.”

IBRC agreed a restructuring of Somerston Hotels legacy £341m facility on 31 January 2013, comprising two tranches:

  • Facility A: a £247m facility, priced at 2.75% margin plus 5.02% in SWAP interest, which was secured by the then latest JLL valuation of the hotel portfolio, dated to March 2012;
  • Facility B: a £92m non-interest bearing account repayable out of any surplus proceeds from a refinancing or sale of the hotel portfolio after facility A is repaid.

Somerston Hotels has £1m in a blocked account as part of the restructuring, while there will be an LTV covenant test in November 2014 and a £35m exit fee is payable on disposal if facility A and B are repaid in full. The two-tranche loan facility expires on 29 May 2015.

Griffiths, writing in Somerston Hotels annual results, stated: “A material recovery of performance and asset value is required to allow this level of bank debt to be fully repaid.”

He continued: “Whilst it is important to note that the contractual terms and conditions of the group’s debt facilities with the bank have not changed and will continue to be operated as normal, continued support by IBRC or any new loan holder, at the end of the term loan must be deemed highly unlikely, and accordingly, the directors are assessing the alternative options for the company and group.”

Somerston Hotels recorded a £0.4m rise in its annual loss to £13.3m for 2012, and an increase in the company’s net liability to £116.6m, driven largely by the devaluation suffered by the hotel portfolio.

The current plan by the directors of Somerston Hotels is to arrange for a third party valuation of the hotel portfolio in October 2014. “Should there be a material difference between the third party valuation and the balance sheet liability, the directors will need to seek a restructure of the group prior to sale.

“Given the special liquidation of IBRC and the potential sale of the loan book, the shape and form of a restructure is currently unknown but will require the support of the loan holder at the time.”

The preference of the directors of Somerston Hotels is for either: a debt-for-equity swap or an extension of the term of the loan, with additional costs and fees for granting the loan extension.

The alternative would be some form of insolvency procedure which “the directors deem to be value destructive for the loan holders’ perspective due to the impact of disruption to the trading business”.

Puma Hotels

Puma Hotels, which is 49.9%-owned by AIM-listed investment company The Hotel Corporation PLC, agreed an extension to its matured IBRC senior loan in June for 11 months to 30 May 2014.

The renewed IBRC facility was for £323.1m, which has risen to £324.8m, and is secured by 19 mid-market UK-wide hotels, against a £185.7m valuation at the end of June this year, implying a current LTV of 174.9%.

The Puma hotel portfolio was valued at £349.6m, at the end of 2011, according to accounts filed with Companies House, and this value then fell to £211.5m, according to a March 2012 revaluation by Christie & Co.

In the company’s 2011 financial results, Puma posted annual losses of £175m, driven by a dramatic fall in the hotel portfolio’s valuation, which ultimately led to the required loan restructuring after the legacy facility fell due.

IBRC’s restructured loan was priced on a variable rate above LIBOR, with an average interest rate in 2012 of 3.37%, and is hedged by an £150m interest rate swap which expires at the end of 2014, meaning the remainder of the facility is subject to interest rate risk.

In its annual results, Puma stated that covenants within the new facility were “revised to reflect the current operating environment” with the interest rate margin reduced and a deferred facility was introduced.

The deferred facility is not due for repayment until the restructured £323.1m loan is repaid.

The 19-strong hotel portfolio, which secured the IBRC debt in Project Rock, includes the 202-bed Walton Hall & Hotel in Warwickshire, the 362-bed Hinckley Hotel, in Leicestershire, the 77-bed Lygon Arms Hotel in the Costwolds, the 152-bed Imperial Hotel in Torquay, the 152-bed Cheltenham Park Hotel and the 154-bed Old Ship Hotel in Brighton.

Since April 2012, Puma has resumed direct management of the hotel portfolio, after Barceló Group sought to terminate its management contract early, paying £20.25m as an early termination fee.

Curzon Hotel Properties

CIT UK Real Estate Partnership, a closed ended UK real estate fund managed by private equity firm CIT Group, acquired a portfolio of 28 Thistle-branded UK-wide hotels in March 2007 for around £400m, financed by Anglo Irish Bank.

By August of the same year, CIT Group sold eight of the three-star 28 hotels to Menzies Holdings Limited for £54m, which is ultimately controlled by R20 on behalf of Robert Tchenguiz.

Curzon Hotels Limited, CIT’s holding company for the hotels, entered voluntary wind-up proceedings as part of a solvent group restructuring, leading to the appointment of Christopher Kim Rayment as liquidator on 22 June 2011.

In mid-February the following year, the 129-bed Kingsley by Thistle Hotel in central London was sold to client of Citi Private Bank for around £40m, leaving 19 remaining hotels.

The 19 Thistle hotels were valued at £187.8m at the end of June 2013, against six separate outstanding IBRC loans with an aggregate unpaid balance of £257.4m, implying an LTV of 137.1%.

Chelsea Harbour Estates

Crowne Plaza Hotel in Marlow, a 168-bed four-star hotel operated by BDL Hotels, is the final hotel within the single tranches of Project Rock.

The hotel was valued at £16m at 28 October 2012, against outstanding £28.5m IBRC loan, which expired at the end of October 2011, meaning the loan is in LTV breach and for non-payment at maturity.

Stephen McCaffer, a director in Marlow Hotel Company Limited, the entity which owns the Crowne Plaza Hotel, wrote in the company’s annual results to the end of October, dated 28 June 2013: “There may be an asset sale but the company may have an opportunity to purchase the debt at a discount.

“There remains a possibility that should the lender be unsatisfied with the value that it can generate from a sale that a further facility agreement will be entered into.”

Marlow Hotel Company Limited recorded a £98,873 profit for the 12 months to 28 October 2012, in a turnaround in fortunes from 2001’s £14.13 loss, which was substantially driven by a £7.95m devaluation of fixed assets, the bulk of which related to the fall in value of Crowne Plaza Hotel to £16m.

This loan tranche is coupled with four separate borrower entities which together own 30 mixed-used commercial property portfolio in Liverpool, which is in the process of sale through Jorden Salata, in a portfolio dubbed Ropewalks.

The Ropewalks granular portfolio was under offer, but the process collapsed and Jorden Salata has returned the opportunity to underbidders.

About CoStar News

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