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Fitch: Most Upper Tier Hotels With CMBS Loans Could Face Default

Thursday April 16th, 2009 - 10:22AM

NEW YORK—According to Fitch Ratings, more than 50% of upscale and luxury hotels in recent vintage, fixed-rate, U.S. commercial mortgage-backed securities may be unable to generate sufficient cash flow to pay debt service by the end of this year. In light of recent substantial declines in the hotel industry’s collective room revenue, Fitch reviewed the performance of the $6.5 billion of high-end hotel loans included in the 2006 and 2007 Fitch-rated, fixed-rate U.S. CMBS to determine the impact if revenue continues to fall at this pace for the remainder of 2009. Because of the high expense margins that hotels typically operate, a 20% revenue decline will result in net cash flow declines between 35% and 40%. In the event that luxury hotel performance continues to decline as it has year to date, more than 50% of hotels involved in CMBS loans may be unable to generate sufficient cash flow to pay debt service. Based on hotel concentrations in recent vintage, fixed-rate transactions ranging from 5% to 15%, large declines in high-end hotels coupled with more moderate declines in middle- and lower- end hotels could result in ratings downgrades, Fitch warned. For more concentrated hotel deals, the downgrades may reach investment grade bonds, while less concentrated deals may see downgrades extend to BB-rated bonds. Fitch further noted that U.S. CMBS loans backed by hotels located in Las Vegas in particular or other high-end leisure destinations face a significant challenge in maintaining debt service.