Le Meridien, the debt-laden owner of London's Grosvenor House and Waldorf hotels, faces the prospect of calling in the administrators this week unless it can convince its bankers to grant it a stay of execution.
Le Meridien's lending banks, which have been propping up the business since it breached its financial covenants earlier this year, have ordered the group to come up with a rescue plan by Friday.
The cash-crunch at the luxury chain, which has been hit by the collapse in global tourism, has arisen because it owes Royal Bank of Scotland a quarterly rent payment of £20m, due next Monday. If the lending banks are not satisfied with the group's refinancing proposals they can block the rental payment to RBS, triggering a default clause, which would presage an administration order.
RBS, which owns Le Meridien's 12 UK hotels under a £1.2bn sale-and-leaseback deal, has threatened to bring in new management if the rental payment is not made. Possible solutions include finding a buyer, persuading its lenders to take a haircut on their combined £1bn debts or convincing RBS to defer or reduce its rental payment.
The 17-strong banking consortium, led by Merrill Lynch and CIBC, has already rejected a £125m debt-for-equity proposal put forward by Guy Hand's Terra Firma investment fund and the private equity group Alchemy Partners.
Mr Hands, who led the £1.9bn buy-out of the chain from Compass two years ago when he headed Nomura Principal Finance Group, manages the hotel group. Under Terra Firma's proposal, the banks would have had to write-off some of their debts. The crisis at Le Meridien has already forced its equity investors, including Nomura, RBS, Alchemy and Abbey National, to write their stakes down to zero.
A second offer has come from Lehman Brothers, the US bank that holds more than £200m of mezzanine debt due in 2005. This would see the bank acquire Le Meridien's European hotels. However, weekend reports that Lehman was working with Blackstone, the US venture capital group that owns London's Savoy hotel, on a deal were denied yesterday by a Blackstone spokesman.
City sources said that calling in liquidators would be rash because the move would mean fire-sales of prime assets at what could well be the lowest point in the economic cycle. A recent survey by PKF, the consultancy firm, said occupancy rates in London hotels had hit their lowest levels for more than 20 years. Trade buyers such as Hilton or Accor would struggle to find funding, one industry watcher said.
The sale of Le Meridien, which has 137 hotels in 56 countries, was struck in July 2001, before the World Trade Centre attacks and the subsequent downturn in the travel industry. The now crippling leasing terms agreed with RBS at the time of the takeover were based on the anticipation of much higher trading volumes.
Before the Sars epidemic, the group was on track to make pre-interest profits of £65m in the year to June against profits of £160m when Nomura bought it. After interest payments it may sink into the red this year.
- More about:
- Investment Banks
- Loans And Lending Market
- Royal Bank Of Scotland