White Knight Appears for Eagle Hospitality Trust And MAS & Singapore Police Force Commenced Joint Investigation

A white knight seems to have appeared for Eagle Hospitality Trust ("EHT") and are in serious discussion with the Sponsor Urban Commons, special restructuring firm and directors of EHT for a deal to take a 70% control of EHT Hotel Manager, that is, the Far East Consortium International Ltd group ("FECIL"). Never-mind that Howard Wu and Taylor Woods had again acted smart on their own to award exclusive negotiation with this new potential white knight instead of doing an open request for proposal from other eligible and reputable suitors which is a more transparent approach and introduced competition for the best deals from the bidders (that would  have best served the interest of unit-holders). Well, at least, the talk with FECIL has gone on for almost 2 months now.

1. White knight enters into picture

Howard Wu and Taylor Woods had signed an agreement with FECIL for a non-binding conditional proposal for an exclusivity period which will expire on July 14, 2020. FECIL is a leading regional conglomerate listed on the Hong Kong Stock Exchange with property development, hotel operations, car parking ventures as well as gaming and entertainment businesses. It has been developing and operating hospitality assets for more than 15 years and is currently developing 13 hotels, owns 29 hotels and holds a minority stake in two hotels, all of which are spread across eight countries. Most of its hospitality assets are internally managed by FECIL. In addition, it has been listed on the Hong Kong Stock Exchange since 1972. A reputable and experienced group with strong financial background as compared to Urban Commons.

2. Implication on EHT if the deal with FECIL goes through and concern that FECIL working in cahoot with Howard Wu and Taylor Woods

The good thing here is that if the deal goes through, then unit-holders can heave sigh of relief that they will get to recuperate part of their original investments instead of a high possibility of not getting a single cent back from their investments into EHT. Please refer to my previous post on the different scenarios of a forced liquidation of EHT hotel assets- "Eagle Hospitality Trust- Updates On Projected Salvageable Hotel Properties Value from Fire-sales".

There were talks by other retail investors that FECIL maybe under the influence or control of Howard Wu and Taylor Woods hence no difference at all to the current situation. I will disagree on these unsubstantiated assertions. FECIL is an established group that has been in business and listed on the Hong Kong stock exchange since 1972. Hongkongers are astute businessmen. They will not be blindly doing charity rescue work and then follow whatever Howard Wu and Taylor Woods wanted. Other main reasons are as follow:

(i) I believed that FECIL is taking this opportunity to expand and venture into the US hospitality market;

(ii) FECIL had asked for a 70% controlling stake in the hotel manager; 

(iii) They also wanted 80^% of the seats on the board of directors managing the hotel manager;

(iv) FECIL develops hotel assets. Gaining control of a REIT will be akin to gaining a backdoor listing for capital asset recycling strategy which adds further synergy to the FECIL conglomerate group. Hence FECIL will de facto became the new sponsor for EHT.

3. New negotiation on Master Lease Agreement and highly probable financial equity dilution faced by Eagle Hospitality Trust Unitholders.

After solving the daily operational issues of running the hotels, the next 2 issues to settle would be (a) the terms and conditions of the new Master Lease Agreement and (b) re-capitalisation of EHT to meet the working capital of running the Business Trust.

3(a) New Master Lease Agreement

 Do not expect the usual high fixed rental component in view of negotiation being done right in the midst of the COVID-19 pandemic. The bargaining power would rest mostly with FECIL. Chances are a high weightage on variable revenue component and even partial rent-free period needs to be given out. This is unfortunately the price that needs to be paid by EHT unitholders for the White Knight to take-over while COVID-19 is still rampant in the US.

3(b) Re-capitalisation of EHT to meet working capital of running the Business Trust.

First and foremost, I do not think that there is sufficient time to do a rights issue exercise. Furthermore, even if there is a rights issue at huge discount, I doubt there will be many takers. Also, most bankers will not dare undertake the rights issue. Most probably, EHT will need to do a private placement of units to FECIL for them to take up a stake in EHT in return for cash injection (the deal maybe also to paydown some of the bank loans). I reckon that there will be a dilution in value for unitholders which can't be help. Will need to keep your fingers crossed that the issuance price is not at the last closing price of US$0.137 per unit. However, the general rule of thumb will be the last 1 mth of last trading price to get the benchmark issuance price. 

Nevertheless, having direct stakes in EHT aligns the interest of FECIL with all parties. With the completion of the above points, the bankers will be willing to accept forbearance of the syndicated bank loan.

4. MAS and CAD of Singapore Police Force commenced investigation into Directors and Officers of EHT

On 5th June 2020, MAS and CAD announced that they have launched a joint investigation into the current and former directors as well as officers responsible for managing EHT. The investigation is in connection with the suspected breaches of disclosure requirement under Section 203 of the Securities and Futures Act. It is interesting to note the statement made that the scope of the joint investigation will be widened if the evidence obtained reveals that other offences may have been committed. I also hope that CAD will dig into the email of the previous CFO and Vice President of Finance on how much they know about the conflict of interest deals done by Howard and Taylor. Personally, I am skeptical on the reasons which they had announced for resignation is due "to personal reasons" and "that there is no matter in relation to the their cessation that needs to be brought to the attention of the shareholders of EHT".

Key questions on the exact time whereby the directors and officers (such as CFO) know of the deficiency in rental deposits and upcoming default as well as the inking of the Non-Disturbance Agreement that transferred US$44Mil of liabilities from lessee to EHT, remain unanswered.

5. Civil lawsuit should be initiated against Howard Wu and Talyor Woods for breach of fiduciary duty and signing Non-Disturbance Agreements on behalf of EHT that are prejudicial to the  unit-holders as per the Audit & Risk Committee of EHT- Claw back US$44.6 Mil from Howard and Taylor

With the White Knight, FECIL, stepping into the picture and resolving the going concern issue, the management of EHT can now consider filing a civil lawsuit for damages from the breach of fiduciary duty of the previous non-executive directors, Howard Wu and Taylor Woods. Directors owe fiduciary duties to their company under common law subject to section 157 of the Companies Act.

Whether to proceed with this aspect will very much depend on how the FECIL deal turns out. I also suspect that Howard and Taylor may have inked a pact to get FECIL to resolve the transferred liabilties of US$44.6Mil from lessee to EHT.

Also, I hope that FECIL is smart enough to get Howard and Taylor to agree to not selling off their stakes in EHT for at least 6 months after the trading suspension as part of the restructuring deal.

In the event that this is not resolved, EHT management team can commence the lawsuit for damages immediately after the conclusion of the FECIL agreements. Howard Wu and Taylor Woods still owns units in EHT that can be sold off  under court order after the trading suspension to compensate unit-holders.

Final thoughts

Hopefully, a deal materialise by the end of the exclusivity period of 14th July 2020 with FECIL. Even if no deal is reached, the Special Restructuring Committee of EHT has reported that they actually have received from a number of parties non-binding, preliminary and indicative expressions of interest ("EOI"). These EOIs were reportedly from credible and reputable asset management companies and institutional investors. My initial fear in my last post was getting the rich buyers, to come out for bidding in the face of the pandemic, will be the most challenging part. Hence the fact that there are now lots of potential buyers willing to take over the running of the US hotels means that the survival-ability of EHT is actually rather high now. The issue is only a matter of how much residual value is left to unit-holders after the completion of the restructuring exercise.