Slowing revenues after Sept. 11 prompted RFS Hotel Investors to seek amendments to the terms of its credit lines. Kevin Luebbers, cfo and v.p. of finance, said the company was not at risk of credit defaults but was trying to be "proactive" as it predicted EBITDA would fall over the next year. Among the changes, the maximum allowable leverage ratio was increased to 50-55 from its prior 45-50. "After Sept. 11, EBITDA was going down. Relaxing these terms was done in recognition of that," he said. "We sought this out proactively; RFS still had a strong balance sheet, compared to our peers in the lodging industry. Our competitors went back to their bank groups for relief because they were in distress. We weren't in that position." The Memphis, Tenn.-based company owns 58 hotels throughout the country.
The amendments relax a handful of financial covenants, including interest coverage, fixed charge coverage and total leverage tests through Dec. 31, 2002. After December, the covenants return to their original terms. Pricing remains based on a tiered credit spread tied to the company's leverage ratio, but the company added a tier to reflect the higher permitted leverage. At the maximum permitted leverage ratio, the company's interest rate would be LIBOR plus 2 1/2 %, as compared to LIBOR plus 2 1/4 % before the amendment.
Banc of America Securities is the lead arranger. There are a total of seven banks in the syndicate. Luebbers explained that the company has focused on minimizing debt and diversifying its business portfolio such as having hotels all over the country -- as a way to get through tough economic times. "The further up the food chain you get in terms of how complex the hotel operation, the more complex the cost structure," he said. "Hotels that are all about the rooms are the most profitable and have a higher profit margin than hotels that have meeting services."