Lenders Relax Hotel Co.' Covenants As Slump Materializes
Germantown, Tenn.-based Equity Inns, a hotel real estate investment trust, has joined the club of companies in the hotel industry that have amended credit lines to relax covenant ratios. Howard Silver, president and chief operating officer for Equity Inns said the decline in the revenue of the hotel industry following the Sept. 11 terrorist attacks put Equity Inns in a position where it did not think it would make the various covenants. "The bank group are pretty understanding as most of these banks are in the other hotels' lines," he said. "The industry has been smashed." Other hotel companies that have sought covenant relief include Starwood Hotels & Resorts Worldwide and RFS Hotel Investors
BANK ONE is the lead manager and Credit Lyonnais and Bank of America are co-leads on the $125 million line of credit. The amendment relaxes the interest coverage, fixed charge coverage and total indebtedness tests, he explained. "Pricing stays on the same grid, but there is an added tier, if necessary," Silver added. As the indebtedness increases the pricing increases at a new tiered level. The banks charged a fee to the company to change the line, he said. The facility is currently priced at 21/ 2% over LIBOR and can be increased up to an extra $15 million, while the maturity date is October 2003. The REIT has properties in 35 states and two-thirds of the hotels are drive-by, so the effect of the slump is tempered, Silver noted. But with one-third of the hotels in fly-to locations, said Silver, flying conditions must recover.
Bank of America also closed an amendment for RFS Hotel Investors that also enacts the same changes, with the added tier and relaxed covenants, while Starwood's leverage and interest coverage ratios have been adjusted by the bank group, led by Deutsche Bank, J.P. Morgan and Lehman Brothers. Morgan Stanley is in the market with an amendment for Extended Stay of America that will increase the spread by 1/4% and relax financial covenants after the hotel operator had low occupancy levels and reported flat earnings.