Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 1 of 2)

On 20 March 2020, the Managers of Eagle Hospitality Trust (“EHT”) received a notice of default and acceleration to the Facilities Agreement issued on behalf of Bank of America which is acting as the overall administrative agent for the syndicate of lenders that provided USD341Mil to EHT. EHT then quickly went on to ask SGX for a voluntary trading suspension in order to prevent a total share price collapse of EHT while it engages lawyers to re-work out operational, financial and loan negotiation with all the different stakeholders.

1. Weak Sponsor Urban Commons Does Not Have Adequate Financial Resources For Emergency

This should be nothing new. From the Queen Mary incident, most folks already know that Urban Commons live by the hand to mouth. It has been unable to produce timely audited financial statements to the City of Long Beach. Unfortunately, the COVID-19 outbreak totally disrupted its hotel businesses. Even though there is a high fixed rental component guaranteed by the Master Leasee Agreement, this is of no use at all in the face of substantial decline in business due to the worsening COVID-19 situation.

The sudden departure of its CFO also seems to be more for the reason of financial issues. Please see my previous post "Eagle Hospitality Trust CFO Suddenly Quit Less Than One Year On The Job For Personal Reasons". In a striking contrast, ARA US Hospitality Trust is still operating normally without such blatant default by its lessee.

Another shocking announcement was made later on that Urban Commons actually did not placed the required full rental deposit as per the Master Lessee Agreement- please see below point.

2. Management of EHT did not disclose to Unitholders that required deposits by Sponsor was not fully handed over.

EHT management did not highlight or disclose to Unitholders that Urban Commons actually already missed placing crucial rental deposits down. The excuse-oophs, I mean reason- here is that the management of EHT was waiting for a letter of credit promised by the sponsor. But this just does not make sense. Even if it is a letter of credit still within the “cure period”, the fact is that the sponsor will most likely breach the lease agreement by not providing this timely. Such information would have been crucial to many retail investors to watch out for potential financial default. 

3. Insufficient clarity on “defaulting events” in Bank Covenants disclosed to Unitholders.

Imagine a scenario for say Suntec REIT and one of its tenant default on rental. Does this mean that all the bank borrowings of Suntec REIT will be due immediately by just 1 tenant defaulting in rental payment? In addition, the bank covenant also strangely ties the bank borrowings to 3 key personnel such that departure of any personnel will lead to a defaulting event also. On hindsight, this just does not make sense for EHT to enter into such a one-sided draconian loan agreement. This either reflects on the lack of common sense or that the financial position of its sponsor are so weak that the bankers forced it down their throat.

I was rather surprised by these stringent bank covenants which were never emphasized to unitholders as well as the lack of clarity on the prospectus (page 120 did not give sufficient clarity on defaulting events). As a matter of fact, the entire EHT management team themselves was caught off guard by the immediate calling back of loan from the syndicated lenders- they were still thinking of paying out dividends under the assumption that the loan covenants have not been breached yet until the Bank of America, the bank administrator of the syndicated loan, served notice on them.

4. What happens next for those still holding on to EHT?

Since the resignation of the CFO of EHT, I have mentioned that investors holding on to EHT better be prepared to do a 100% write off of their investments similar to what happened to Hyflux. However, the lightning speed of the collapse did catch me off-guard in March 2020- I was planning to re-evaluate on what to do with my existing holdings of EHT after the payout of dividends (which unfortunately never materialise).

No one can predict with 100% certainty what will happen next. But there are basically 3 scenarios that can happen, and we can then rationalise using probability to figure out it goes which way:

Scenario 1: EHT goes into immediate liquidation and firesales of its hotels to 3^rd parties as bankers refuses to grant any further forbearance of the breach of bank covenant.

Scenario 2: EHT do an equity fund raising exercise and also a partial asset sales to repay bulk of the bank loan as well as restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

Scenario 3: EHT sell off a significant stake to raise cash, restructure the Master Lease Agreements with new operators and bankers are willing to support the new structure.

I think I will do a separate elaboration and quick financial projection in my next post on the above scenarios to illustrate as this post seems getting too long winded. But basically, the longer the whole negotiation and restructuring drags on, the better it is for existing shareholders still holding on to EHT. Things are getting slightly more positive with new drugs (remdesivir) and vaccines being developed against COVID-19 and the re-opening of US economy. But if the bankers decided that the future storyline presented by the management of EHT are utter rubbish, then this will lead to immediate firesales of the hotels at current depressed price and unitholders will not get back a single cent.    

Please also see my part 2 posting on EHT:

Will Eagle Hospitality Trust Survive Upcoming Bankruptcy Threat? (Part 2 of 2)