Hotel bankruptcies, workouts and turnarounds - By Jim Butler, author of

Hotel Lawyers on the TARP, the TALF, and the ugly. What does it mean to hotel owners and lenders? Hotel Bankruptcy arrest by the TALF? Is there a turnaround for hotels here? Or do owners and lenders continue to fret?

Today was potentially a very important one as the US Financial Stimulus Program goes to work. The lending facility launched Tuesday, March 3, 2009 by the U. S. Department of the Treasury and the Federal Reserve is designed to generate up to $1 trillion in consumer and small business loans. This is a significant part of the TARP (the bailout bill or financial stimulus package also called the Troubled Asset Relief Program). This specific part is called the TALF standing for "Term Asset-Backed Securities Loan Facility" which is scheduled to start dispersing funds in about three weeks, making nonrecourse loans.

Here's what I think it means for the hotel industry. . .


What happened today? TALF is launched with funding scheduled for March 25.

Optimists hope that the TALF program announced today could mark a turning point in the economy and financial markets. It would do this by providing liquidity in the asset-backed securities market. The program announced today would make nonrecourse loans available to buyers of AAA-rated securities backed by consumer finance debt such as auto, credit card, student, and SBA-guaranteed loans.

This TALF launch will start with $200 billion funded by the Federal Reserve Bank of New York. If successful, the optimists hope that this financing will grow to a $1 trillion facility and will jumpstart the economy sometime in the third quarter of 2009. To be successful, it will have to turn around the prevailing pessimistic views of the economy and its prospects by consumers, businesses, and investors.

Presently, the TALF program applies only to consumer oriented loans, but the program specifically contemplates the possible expansion to commercial mortgage-backed securities and other types of AAA-rated newly issued asset-backed securities or ABS. This ABS market went from a peak of $1 trillion a year in 2005 and 2006, to only $2.1 billion for 2009 (through February).

How would the TALF work? Incredible leverage and cheap money.

The basic premise of the TALF is that the United States government will lend money to investors for up to three years to buy bonds backed by ABS loans. The loans must be AAA-rated, so lenders will have to keep riskier loans or over collateralize the pools.

The Wall Street Journal today said that under the TALF, an investor may be able to borrow up to $92 million to buy $100 million of bonds backed with ABS loans. That provides more than 12 times leverage and could really accelerate returns to investors. Another attractive feature is that the Fed will not require investors to post additional collateral if the ABS values fall during the three-year term of the life of the loan.

How can hotel owners or lenders use the TALF to avoid hotel bankruptcies and hotel mortgage losses?

The TALF does not do anything -- directly -- to avoid or mitigate pain for hotel owners and lenders. In its present form, it applies only to certain newly originated and securitized consumer-oriented loans (such as auto loans, credit card loans, and the like). But everyone seems to believe that if the TALF is successful in creating liquidity for these ABS loans, it will be expanded to other "commercial loans" which could include hotels.

Considering that the optimists hope to see an impact from the TALF program in the third quarter of 2009, it may be a while before this program is expanded. And in any event, it is likely to be a substantial time before an expanded program could apply to hotel assets and have any impact.

It is also critical to note that the present TALF program applies only to newly issued, AAA-rated securities, and that with deterioration in hotel fundamentals (decrease in revenues and NOI), changes in cap rates (rising at least 200 basis points in 2009), and declining LTV ratios for hotels as an asset class, it may be very difficult for this approach to refinance hotel properties that took on 80% loan to value financing a few years ago.

It is going to be a very tough and painful ride.

Based upon all the data provided in the articles below, and the continuing consensus that the earliest turning point for a recovery might be in the last half of 2010, "opportunistic investors" are now rumored to be looking for $.25 on the dollar as the price they will pay for hotel assets. And some say that 2012 or 2014 might be good years to find these values if they can't do it sooner.

We believe these extreme valuations and timeframe are unrealistic. We do, however, see significant price reductions coming for hotel loans and hotel assets at least through 2010 or beyond. We hope the discounts are not as severe as the vulture investors are currently demanding. We hope that the TALF and other programs under TARP will jump start some liquidity, a more optimistic view of the economy for consumers, businesses and investors, and fix the broken financial system.

If it doesn't, we will continue in free fall until some other "event" changes the "self reinforcing cycle" we are in.

This is Jim Butler, author of and hotel lawyer, signing off. We've done more than $50 billion of hotel transactions and more than 100 hotel mixed-used deals in the last 5 years alone. Who's your hotel lawyer?

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