U.S. hotels can't go private due to credit crunch
LOS ANGELES (Reuters) - U.S. hotel mergers and acquisitions will likely be on hold through at least the rest of the year because Wall Street bankers can't "check out" of the debt they floated to finance the go-go deals of 2007.
"For the next 12 to 18 months it is going to be like getting a turtle through a snake's belly," Jackson Hsieh, head of real estate, lodging and leisure at UBS Securities, said at a lodging industry conference here this week.
The logjam has already contributed to a slump in stock prices, with shares of Marriott International Inc (MAR.N) down 30 percent since last April, while shares of Starwood Hotels & Resorts Worldwide Inc (HOT.N) are down 39 percent since July. The Dow U.S. Hotels Index .DJUSLG has lost 27 percent of its value since July.
Wall Street banks are sitting on billions of dollars in debt tied to hospitality sector deals -- part of the trillions of dollars of debt-backed securities that can't be sold in the wake of the subprime mortgage crisis that has roiled global financial markets.
"Subprime was just the catalyst," said Michael Levy, managing director at Morgan Stanley.
He said the market has effectively been frozen since the last major deal -- private equity firm Blackstone Group LP's (BX.N) July 2007 announcement of plans to acquire Hilton Hotels for $20 billion plus debt. The deal closed in October.
"You can't go private now because the debt markets are not available," said Chris Nassetta, Hilton's new chief executive.
M&A activity in the hotel industry, including deals to take public companies private, reached $55 billion in 2007 -- the highest value ever and the No. 3 year in terms of transaction volume, according to PricewaterhouseCoopers.
Much of that was driven by highly leveraged private capital and its access to increasingly liquid and sophisticated debt markets -- a source that has since imploded.
"The 2007 deal flow was a product of mispriced risk on the debt side ... multi-property transactions aren't going to happen," said Ken Cruse, chief financial officer at Sunstone Hotel Investors Inc (SHO.N).
He and others said hotel deals priced below $100 million can be done, but financing for anything above that is largely nonexistent.
"We are all looking for more creative ways to finance deals ... it is much more difficult to syndicate exposure on the back end," said Jake Puryear, head of U.S. lodging and leisure at Banc of America Securities.
Meanwhile, takeover talk has disappeared from the industry's lexicon as private capital becomes scarce and public companies are expected to buy back their own stock rather than take on extra assets.
"We are not going to see the M&A premiums in our stock prices that we saw in the last couple of years," said Jay Shah, CEO at Hersha Hospitality Trust HT.A.
Unlike past crises such as the savings and loan breakdown of the 1980's, formation of a government agency to buy back distressed mortgages and other debt is not a solution because today's debt is not directly tied to collateral, industry experts said.
"The derivatives are two steps removed from the collateral," Hsieh said.
Instead, Wall Street itself will have to find buyers.
"Once the debt starts to sell, you will need to re-price the whole portfolio. It has to happen," the UBS managing director said.
Steve Mendell, head of acquisitions and development at HEI Hotels & Resorts, said that if industry fundamentals worsen, many loans could become distressed once it comes time to refinance.
The problem comes at the same time the hospitality industry faces a likely slowdown as the U.S. economy heads into a possible recession.
Industry sources said financial results from hotel operators and owners over the next few months could have a big impact on how the debt crisis works out.
"Weak results could extend the time for credit to clear," said Mark Hoplamazian, CEO of Global Hyatt Corp.
(Editing by Phil Berlowitz)
