Eagle Hospitality Trust
CASE SUMMARY: Eagle Hospitality REIT Subsidiaries File Chapter 11 to Sell Assets While Exploring Other Restructuring Alternatives
Wed 01/20/2021 12:58 PM
Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
EHT US1 Inc., a Singapore-based company with several affiliates, filed for chapter 11 protection on Monday, Jan. 18, in the Bankruptcy Court for the District of Delaware. The debtors are members of the broader Eagle Hospitality Group, which was established in May 2019 with the principal strategy of investing on a long-term basis in a diversified portfolio of income-producing hotels. The debtors’ parent, Singapore-based publicly held Eagle Hospitality Real Estate Investment Trust, or EH-REIT, is not a debtor “at this time.” However, the debtors’ first day declaration says that “should EH-REIT file a petition commencing its own chapter 11 case, it is expected that it will seek the joint administration of its cases with the Debtors’ Chapter 11 Cases and to make other first day relief applicable to its case as well.” Continue reading for our First Day by Reorg team's full case summary of the Eagle Hospitality chapter 11 filing and request a trial for access to our coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities: https://reorg.com/trial
When out-of-court restructuring efforts were unsuccessful, DIP financing became the only means for paying for ongoing expenses, and the debtors filed for chapter 11 protection “to preserve assets and maximize value for the Debtors’ stakeholders through a value-maximizing disposition of the Debtors’ assets (while not foreclosing any other value maximizing strategies).” Although the first declaration contemplates “an orderly sale process,” the debtors say that Eagle Hospitality Group “will also continue to explore other restructuring alternatives, such as an equity infusion.” The debtors have also secured a $100 million DIP facility from funds managed by or affiliated with Monarch Alternative Capital LP, with liens on previously unencumbered hotels.
The first day hearing has been scheduled for tomorrow, Thursday, Jan. 21, at 2 p.m. ET.
As of Sept. 30, 2020, unaudited financial statements of Eagle Hospitality Group (consisting of EH-REIT and its direct and indirect subsidiaries), which includes nondebtor affiliates, report consolidated assets of $779 million and consolidated liabilities totaling $630 million. The Eagle Hospital Group has $509.9 million of funded debt as of the petition date across the debtors and nondebtors (“the difference being the mortgage loans in respect of the Non-Debtor Propcos”), as shown below:
The prepetition credit facility is secured by a pledge of the equity interests in 15 debtor propcos but not secured by mortgages on the hotels owned by the debtor propcos; all of the obligors and guarantors under the prepetition credit facility (except for EH-REIT and Eagle Hospitality Business Trust) are debtors. The administrative agent issued various notices of default under the prepetition credit agreement, and the parties entered into a forbearance agreement that was extended multiple times with the last extension scheduled to expire on Jan. 22. “A few hours before the commencement of the Chapter 11 Cases (and after being advised that its offer to provide DIP financing would not be accepted given the receipt of a superior offer from the DIP Lenders) the Administrative Agent sent a notice to the Eagle Hospitality Group advising it that any chapter 11 filing by the Debtors was not authorized and neither was any grant of a security interest or mortgage against the Hotels owned by the Debtors,” says the first day declaration (emphasis added).
The Eagle Hospitality Group also owes $18.3 million incurred by debtor USHIL Holdco Member LLC in connection with a secured interest rate swap agreement with Bank of the West, which shares in the collateral securing the prepetition credit facility. There is $61.6 million outstanding of loans secured by mortgages on the hotels owned by the nondebtor propcos (and the loans are “effectively a separate silo” of debt from the prepetition credit facility, and defaults under the prepetition credit facility do not result in cross-defaults under the mortgages), as follows:
The mortgage loans are guaranteed by Woods, Wu and EHT U1 on an unsecured basis pursuant to a “bad boy” or “springing recourse” guarantee.
In addition, there is an $89 million unsecured loan provided by Lodging USA Lendco LLC to debtor EHT US1 Inc. The debtors say that in connection with the investigation of Woods and Lu, the special committee and REIT trustee attempted to determine whether Lodging USA is held directly or indirectly by Woods or Wu.
An announcement to the Singapore exchange on the commencement of the U.S. bankruptcy cases, along with a capital structure chart of the Eagle Hospitality Trust, can be found HERE.
In May 2019, securities of Eagle Hospitality Trust were issued in Singapore through an initial public offering on the main board of the Singapore Exchange Securities Trading Ltd. as “stapled securities,” comprising one unit of EH-REIT and one unit of Eagle Hospitality Business Trust stapled together and treated as a single instrument. Eagle Hospitality Business Trust is owned by third parties and is not a subsidiary of EH-REIT and not a debtor. The stapled securities were publicly traded on the Singapore Exchange until March 19, 2020, when trading was halted, and voluntarily suspended on March 24. Approximately 15% of the EHT’s equity interests were, immediately after the IPO, held by Howard Wu and Taylor Woods collectively, with the remaining balance of approximately 85% owned by others. As of Dec. 31, 2019, Woods and Wu held approximately 13.69% of EHT’s equity interests. The equity interests in each of the other members of the Eagle Hospitality Group are 100% owned, directly or indirectly, by EH-REIT.
The Eagle Hospitality Group debtors hold approximately $3.5 million in cash.
The company attributes the bankruptcy filing to master lessees stopping to pay propcos (separate LLC members of the Eagle Hospitality Group that own each of the group’s hotels) starting with January 2020 rent and failing to honor obligations under agreements with hotel management companies including with respect to “critical” operating expenses. This led to the closure of “most” of the hotels and litigation by unpaid creditors and taxing authorities and the imposition of statutory liens, in addition to the accrual of $52.9 million in obligations to vendors, contractors, taxing authorities and others. “Myriad” defaults under master leases were only exacerbated by the Covid-19 pandemic, according to the company. In March, a syndicate of lenders, including Deutsche Bank AG, DBS Bank Ltd., UBS AG, Bank of the West and Bank of America NA under the Eagle Hospitality Group’s largest credit facility with $341 million outstanding, asserted defaults and acceleration of the facility.
A special committee of directors of the former REIT manager, Eagle Hospitality REIT Management Pte. Ltd., which was removed as manager on Dec. 30, 2020, was appointed in March. The special committee hired Paul Hastings, FTI and Moelis, which began to “explore options,” including through negotiations with prepetition lenders, the commencement of an investigation (discussed more fully below) into the prepetition activities of the master lessees and Urban Commons LLC (Eagle Hospitality Group’s sponsor, whose equity interests are controlled by Woods and Wu) and the termination of the master leases and start of legal actions to obtain legal control over the hotels.
The special committee, seeking to “disentangle the conflicts of interest related to the role of Woods and Wu,” with the REIT trustee, DBS Trustee Ltd., acted to remove Woods and Wu from their roles. The special committee and the REIT trustee also directed the CRO and counsel to investigate past transactions with the master lessees (controlled by Woods and Wu) to determine if there was any improper use of past influence and identify if there were any other irregularities during their tenure.
The Eagle Hospitality Group served notices of termination on the master lessors in late September, which resulted in the contractual termination of the master leases at the beginning of October, according to the debtors. The group also began unlawful-detainer actions against the master lessees to obtain legal control of the hotels, none of which have been contested, and the group has obtained legal control of 11 of its 18 hotels; the remainder of the actions are in the “last stages” of obtaining legal control of the hotels. The debtors say that they intend to file adversary proceedings to seek declarations that (a) the master leases terminated according to their terms prepetition and (b) the continued legal control of any of the debtors’ hotels by the master lessees constitutes a violation of the automatic stay as an attempt to maintain control of assets of the debtors’ estates.
Eagle Hospitality Group also attempted to engage a new manager to recapitalize EH-REIT, but the proposed new manager was rejected at an extraordinary Dec. 30 general meeting of EHT’s unitholders, resulting in removal of the former REIT manager and a liquidity crisis and the loss of a proposed $125 million bridge facility from prepetition lenders that was tied to the appointment of the new proposed manager. The debtors stress that the Singapore public filings warned that failure to obtain approval of the resolutions at the meeting would likely lead to a chapter 11 filing and “warned that there was no certainty or assurance that a chapter 11 reorganization would be successful or that stapled security holders would receive any value in a chapter 11 wind-down.” The Eagle Hospital Group has appointed, as part of the bankruptcy, David Mack of Drivetrain as independent director of EHT US1 Inc., which is the indirect owner of, and controls through its member-managed subsidiaries, all of the propcos.
The company reports $500 million to $1 billion in both assets and liabilities. The debtors are represented by Paul Hastings as general bankruptcy counsel, Cole Schotz as local counsel, Rajah Tann as Singapore law counsel and Walkers as Cayman law counsel. The debtors have retained FTI along with Alan Tantleff as CRO, and Moelis as investment banker. Donlin, Recano is the claims and noticing agent. The case has been assigned to Judge Christopher S. Sontchi (case No. 21-10036).
Background
The group owns a portfolio of 18 hotels in the United States, primarily in corporate, leisure and airport demand locations in the “upper upscale, upscale, and upper midscale market segments,” licensed under premium and “well recognized” American hotel brands through franchise agreements, consisting of 5,418 rooms in eight states. Of the 18 propcos, 15 are debtors and three are not debtors. All of the hotels are licensed through franchise agreements other than the Queen Mary Long Beach in California, which is not branded through any franchise agreement. The Eagle Hospitality Group consists of (i) publicly held Singapore-based Eagle Hospitality Real Estate Investment Trust (the debtors’ nondebtor parent) and (ii) Eagle Hospitality Real Estate Investment Trust’s 38 direct and indirect subsidiaries.
On a consolidated basis, Eagle Hospitality Group’s revenue for the 2019 fiscal year was approximately $51.6 million.
Eagle Hospital Group’s hotels were valued at $726.9 million ($645.9 million with respect to the debtor propcos’ hotels) on an “as is” basis and $899.6 million ($776.4 million with respect to the debtor propcos’ hotels) on a “stabilised basis” (on a post-Covid-19 basis) as of an Aug. 31 valuation from Colliers International Consultancy & Valuation (Singapore) Pte. Ltd.
The following table describes each of Eagle Hospitality Group’s 18 hotels, of which all but two are closed:
In connection with unlawful detainer actions commenced by Eagle against the master lessees, the status of the actions underlying the seven properties of which Eagle does not yet have control is shown below:
The debtors say that the actions of the master lessees have caused “significant issues” for the franchisors branding Eagle hotels, and “each and every'' branded hotel received notices of default and termination from the relevant franchisors as a result of the master lessees’ failure to cure defaults for nonpayment of fees and other amounts due and owing. These defaults began before the onset of the pandemic-impacted travel and the economy at large, as certain hotel managers indicated that their decisions to close the hotels were “based on the failure of the Master Lessees’ to fully fund operating expenses, not that business volumes necessitated closing the Hotels.” The pandemic exacerbated these challenges, the debtors say, noting as an example that under “more normal circumstances,” Eagle might have been able to replace the master lessees with lessees “who would have been eager to operate” Eagle’s “attractive portfolio of Hotels.” The debtors describe the combination of curbed revenue stemming from the master lessees’ failure to pay rent and the pandemic’s downward impact on the supply of interested replacement lessees as a “classic ‘one-two punch.”
Further, the debtors say that while the master lessees have asserted at times that failures to make hotel-related payments were caused by the pandemic, FTI has investigated these assertions and determined that the master lessees’ “pattern of disregard for their obligations began well before the full onset of COVID-19 in March 2020 and the beginning of the Master Lessees’ rent defaults with respect to January 2020 rent, and in fact dates back to 2019.” In addition, statutory lien amounts between the debtors and nondebtors with respect to litigation across the portfolio of hotels total $2.8 million (of which $2.79 million relates to debtors and $50,000 relates to nondebtors). The debtors state the Eagle disputes its liability under “many of these claims,” lamenting that as the owner of the hotels, it has inevitably been targeted by claimants and forced to defend itself in numerous legal disputes, “thus paying the price for others’ failure.”
Estimated property-related claims asserted against the debtor and nondebtor propcos due to the master lessees’ defaults are shown below:
Among the “troubling conduct uncovered by the CRO’s investigation,” the debtors allege that Woods and Wu, on behalf of both the applicable debtor propcos and master lessees, entered into a total of six separate nondisturbance agreements with hotels in Dallas, Atlanta, Denver and New Jersey, in which the propcos guaranteed all of the master lessees’ obligations under related hotel management agreements. The propcos also guaranteed the repayment of approximately $6.1 million of “key money” paid, or to be paid, by the hotels to the master lessees as an incentive to enter into those hotel management agreements.
The debtors estimate that as of the petition date, there is a total of approximately $24.9 million of unmet master lessee obligations under the various hotel management agreements. Also, as a result of these guarantees of the hotel management agreements by the debtor propcos, the debtors estimate that they owe approximately $6.1 million in key money.
The investigation also found alleged irregularities with the conduct of Wood and Wu in connection with their control and management of one of the debtors’ most valuable hotels - the Queen Mary Long Beach - a repurposed ocean liner, leased by the debtors under long-term leases with the city of Long Beach. The Queen Mary is also sublet to a master lessee under one of the master leases.
From the investigation, the CRO discovered that Woods submitted an unauthorized loan application on behalf of debtor Queen Mary Propoco under the Paycheck Protection Program under the CARES Act for approximately $2.3 million, which remains in dispute. The master lessee under the Queen Mary lease defaulted on its obligations under the ground leases.
The CRO investigation remains ongoing into the past transactions undertaken by Woods and Wu.
As the EHT’s stapled securities are publicly listed on the Singapore exchange, the Eagle Hospitality Group is subject to “significant oversight” by Singapore Exchange Securities Trading Ltd., or SGX, including disclosure requirements and other regulatory frameworks.
In the months leading up to the bankruptcy filing, the Eagle Hospitality Group issued required Singapore public reports related to its financial situation and updates regarding defaults and the CRO’s investigation. Following inquiries from Monetary Authority of Singapore, or MAS, and SGX regarding the disclosures, the Commercial Affairs Department of the Singapore Police Force announced the commencement of a joint investigation into the then current and former directors and officers of EH-REIT and Eagle Hospitality Business Trust in connection with “suspected breaches of public disclosure” in June 2020.
The Eagle Hospitality Group “understands” that in October, as part of the ongoing investigation, all of the then current and former Singapore-based directors of the former REIT manager and the BT-Trustee manager were arrested and released on bail on reasonable suspicion that certain provisions of the collective investment scheme under the Singapore securities laws were breached. At the end of December, in accordance with a directive issued by MAS, the former REIT manager was removed.
EH-REIT and the REIT trustee continue to cooperate with the MAS investigation and have accepted all directives from MAS and SGX, including providing additional information, according to the first day declaration.
The corporate organizational structure is shown below:
The debtors' largest unsecured creditors are listed below:
The case representatives are as follows:
DIP Financing Motion
The debtors request up to $100 million in superpriority senior secured DIP financing based on a commitment letter and term sheet from funds managed by or affiliated with Monarch Alternative Capital, with an additional $25 million available to the extent that the debtors reopen one or more existing hotels during the bankruptcy case. Wilmington Trust is the DIP agent. $40 million would become available on an interim basis. The commitment letter includes a “no-shop” provision regarding DIP financing as required by the DIP lenders, but the debtors may respond to unsolicited proposals. The debtors say that they expect to file a DIP credit agreement in advance of the interim hearing.
The borrowers under the DIP facility would be USHIL Holdco Member LLC, Atlanta Hotel Holdings LLC, ASAP Salt Lake City Hotel LLC, Sky Harbor Denver Holdco LLC, Eagle Hospitality Trust S1 Pte. Ltd., and Eagle Hospitality Trust S2 Pte. Ltd.
The debtors stress that they chose the DIP lenders because the proposed DIP financing is “no more expensive than the other offers, while affording the Debtors more control of their chapter 11 cases (including through such provisions as more flexible milestones and less restrictive events of default, and no ‘roll-up’ of prepetition debt).”
Further, as the “DIP Lenders accepted a collateral package consisting largely of previously unencumbered assets, the Debtors are able to avoid a priming contest with their Prepetition Lenders.” The DIP collateral consists of 15 properties, as listed HERE, consisting of 15 previously unencumbered hotels (or, in the case of the Queen Mary Long Beach hotel, a lien on the proceeds of the Queen Mary Long Beach hotel lease). The DIP collateral is not prepetition facility collateral, and the DIP collateral also excludes liens on avoidance actions and their proceeds.
The debtors also say that they do not need to use the prepetition lenders’ cash collateral, therefore avoiding a dispute over the need for, or sufficiency of, adequate protection. The debtors reserve rights as to whether any funds are cash collateral.
The DIP financing bears interest at L+6.75% (subject to a LIBOR floor of 0.5%), with an additional 2% for the default rate, and matures 12 months after the closing date, 45 days after entry of the interim DIP order if the final order has yet to be entered or other customary events. The DIP proceeds would provide funds for operating expenses and “the Debtors’ restructuring efforts, including the marketing and sale of substantially all of their assets.”
The facility includes an original issue discount of 1% and an annual administrative agency fee in an amount to be agreed upon (not to exceed $100,000).
In support of the proposed DIP financing, the debtors filed the declaration of CRO Tantleff, who states that the debtors have “minimal cash available to maintain current day-to-day operations and currently project that they already have insufficient available cash to fund their working capital,” and that the debtors will require “as much” as $10 million prior to entry of the final order.
Lawrence Kwon, managing director of Moelis & Co., the debtors’ investment banker, also submitted a declaration, stating that after out-of-court restructuring efforts failed, he requested that the preposition lenders make a DIP financing proposal, after which the prepetition administrative agent provided a proposal. “The Debtors and their advisors ultimately determined that the proposed DIP Lenders’ proposal was the most viable option,” Kwon adds. The declaration continues that the debtors will not be obligated to pay any exit or backstop fee and there are no prepayment penalties “in the event the Debtors wish to refinance in the future.”
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carve-out for professional fees is $2.5 million. For purposes of the carve-out, professional fees would exclude any success, transaction or financing fees required to be paid to any retained investment banker, which fees may not exceed $10 million in the aggregate.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
| Summary |
| Debtors are members of the Eagle Hospitality Group, which was established in 2019 to invest in a diversified portfolio of hotels; nondebtor parent is Singapore-based publicly held Eagle Hospitality Real Estate Investment Trust |
| Blame bankruptcy on master lessees’ failure to pay hotel-owning debtors and meet obligations under hotel management agreements, resulting in defaults by franchisors and ensuing litigation with unpaid creditors and taxing authorities |
| Seek to sell assets while continuing to explore other restructuring initiatives, including an equity infusion |
| Secured $100 million DIP financing commitment from Monarch Alternative Capital affiliates |
EHT US1 Inc., a Singapore-based company with several affiliates, filed for chapter 11 protection on Monday, Jan. 18, in the Bankruptcy Court for the District of Delaware. The debtors are members of the broader Eagle Hospitality Group, which was established in May 2019 with the principal strategy of investing on a long-term basis in a diversified portfolio of income-producing hotels. The debtors’ parent, Singapore-based publicly held Eagle Hospitality Real Estate Investment Trust, or EH-REIT, is not a debtor “at this time.” However, the debtors’ first day declaration says that “should EH-REIT file a petition commencing its own chapter 11 case, it is expected that it will seek the joint administration of its cases with the Debtors’ Chapter 11 Cases and to make other first day relief applicable to its case as well.” Continue reading for our First Day by Reorg team's full case summary of the Eagle Hospitality chapter 11 filing and request a trial for access to our coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities: https://reorg.com/trial
When out-of-court restructuring efforts were unsuccessful, DIP financing became the only means for paying for ongoing expenses, and the debtors filed for chapter 11 protection “to preserve assets and maximize value for the Debtors’ stakeholders through a value-maximizing disposition of the Debtors’ assets (while not foreclosing any other value maximizing strategies).” Although the first declaration contemplates “an orderly sale process,” the debtors say that Eagle Hospitality Group “will also continue to explore other restructuring alternatives, such as an equity infusion.” The debtors have also secured a $100 million DIP facility from funds managed by or affiliated with Monarch Alternative Capital LP, with liens on previously unencumbered hotels.
The first day hearing has been scheduled for tomorrow, Thursday, Jan. 21, at 2 p.m. ET.
As of Sept. 30, 2020, unaudited financial statements of Eagle Hospitality Group (consisting of EH-REIT and its direct and indirect subsidiaries), which includes nondebtor affiliates, report consolidated assets of $779 million and consolidated liabilities totaling $630 million. The Eagle Hospital Group has $509.9 million of funded debt as of the petition date across the debtors and nondebtors (“the difference being the mortgage loans in respect of the Non-Debtor Propcos”), as shown below:
The prepetition credit facility is secured by a pledge of the equity interests in 15 debtor propcos but not secured by mortgages on the hotels owned by the debtor propcos; all of the obligors and guarantors under the prepetition credit facility (except for EH-REIT and Eagle Hospitality Business Trust) are debtors. The administrative agent issued various notices of default under the prepetition credit agreement, and the parties entered into a forbearance agreement that was extended multiple times with the last extension scheduled to expire on Jan. 22. “A few hours before the commencement of the Chapter 11 Cases (and after being advised that its offer to provide DIP financing would not be accepted given the receipt of a superior offer from the DIP Lenders) the Administrative Agent sent a notice to the Eagle Hospitality Group advising it that any chapter 11 filing by the Debtors was not authorized and neither was any grant of a security interest or mortgage against the Hotels owned by the Debtors,” says the first day declaration (emphasis added).
The Eagle Hospitality Group also owes $18.3 million incurred by debtor USHIL Holdco Member LLC in connection with a secured interest rate swap agreement with Bank of the West, which shares in the collateral securing the prepetition credit facility. There is $61.6 million outstanding of loans secured by mortgages on the hotels owned by the nondebtor propcos (and the loans are “effectively a separate silo” of debt from the prepetition credit facility, and defaults under the prepetition credit facility do not result in cross-defaults under the mortgages), as follows:
The mortgage loans are guaranteed by Woods, Wu and EHT U1 on an unsecured basis pursuant to a “bad boy” or “springing recourse” guarantee.
In addition, there is an $89 million unsecured loan provided by Lodging USA Lendco LLC to debtor EHT US1 Inc. The debtors say that in connection with the investigation of Woods and Lu, the special committee and REIT trustee attempted to determine whether Lodging USA is held directly or indirectly by Woods or Wu.
An announcement to the Singapore exchange on the commencement of the U.S. bankruptcy cases, along with a capital structure chart of the Eagle Hospitality Trust, can be found HERE.
In May 2019, securities of Eagle Hospitality Trust were issued in Singapore through an initial public offering on the main board of the Singapore Exchange Securities Trading Ltd. as “stapled securities,” comprising one unit of EH-REIT and one unit of Eagle Hospitality Business Trust stapled together and treated as a single instrument. Eagle Hospitality Business Trust is owned by third parties and is not a subsidiary of EH-REIT and not a debtor. The stapled securities were publicly traded on the Singapore Exchange until March 19, 2020, when trading was halted, and voluntarily suspended on March 24. Approximately 15% of the EHT’s equity interests were, immediately after the IPO, held by Howard Wu and Taylor Woods collectively, with the remaining balance of approximately 85% owned by others. As of Dec. 31, 2019, Woods and Wu held approximately 13.69% of EHT’s equity interests. The equity interests in each of the other members of the Eagle Hospitality Group are 100% owned, directly or indirectly, by EH-REIT.
The Eagle Hospitality Group debtors hold approximately $3.5 million in cash.
The company attributes the bankruptcy filing to master lessees stopping to pay propcos (separate LLC members of the Eagle Hospitality Group that own each of the group’s hotels) starting with January 2020 rent and failing to honor obligations under agreements with hotel management companies including with respect to “critical” operating expenses. This led to the closure of “most” of the hotels and litigation by unpaid creditors and taxing authorities and the imposition of statutory liens, in addition to the accrual of $52.9 million in obligations to vendors, contractors, taxing authorities and others. “Myriad” defaults under master leases were only exacerbated by the Covid-19 pandemic, according to the company. In March, a syndicate of lenders, including Deutsche Bank AG, DBS Bank Ltd., UBS AG, Bank of the West and Bank of America NA under the Eagle Hospitality Group’s largest credit facility with $341 million outstanding, asserted defaults and acceleration of the facility.
A special committee of directors of the former REIT manager, Eagle Hospitality REIT Management Pte. Ltd., which was removed as manager on Dec. 30, 2020, was appointed in March. The special committee hired Paul Hastings, FTI and Moelis, which began to “explore options,” including through negotiations with prepetition lenders, the commencement of an investigation (discussed more fully below) into the prepetition activities of the master lessees and Urban Commons LLC (Eagle Hospitality Group’s sponsor, whose equity interests are controlled by Woods and Wu) and the termination of the master leases and start of legal actions to obtain legal control over the hotels.
The special committee, seeking to “disentangle the conflicts of interest related to the role of Woods and Wu,” with the REIT trustee, DBS Trustee Ltd., acted to remove Woods and Wu from their roles. The special committee and the REIT trustee also directed the CRO and counsel to investigate past transactions with the master lessees (controlled by Woods and Wu) to determine if there was any improper use of past influence and identify if there were any other irregularities during their tenure.
The Eagle Hospitality Group served notices of termination on the master lessors in late September, which resulted in the contractual termination of the master leases at the beginning of October, according to the debtors. The group also began unlawful-detainer actions against the master lessees to obtain legal control of the hotels, none of which have been contested, and the group has obtained legal control of 11 of its 18 hotels; the remainder of the actions are in the “last stages” of obtaining legal control of the hotels. The debtors say that they intend to file adversary proceedings to seek declarations that (a) the master leases terminated according to their terms prepetition and (b) the continued legal control of any of the debtors’ hotels by the master lessees constitutes a violation of the automatic stay as an attempt to maintain control of assets of the debtors’ estates.
Eagle Hospitality Group also attempted to engage a new manager to recapitalize EH-REIT, but the proposed new manager was rejected at an extraordinary Dec. 30 general meeting of EHT’s unitholders, resulting in removal of the former REIT manager and a liquidity crisis and the loss of a proposed $125 million bridge facility from prepetition lenders that was tied to the appointment of the new proposed manager. The debtors stress that the Singapore public filings warned that failure to obtain approval of the resolutions at the meeting would likely lead to a chapter 11 filing and “warned that there was no certainty or assurance that a chapter 11 reorganization would be successful or that stapled security holders would receive any value in a chapter 11 wind-down.” The Eagle Hospital Group has appointed, as part of the bankruptcy, David Mack of Drivetrain as independent director of EHT US1 Inc., which is the indirect owner of, and controls through its member-managed subsidiaries, all of the propcos.
The company reports $500 million to $1 billion in both assets and liabilities. The debtors are represented by Paul Hastings as general bankruptcy counsel, Cole Schotz as local counsel, Rajah Tann as Singapore law counsel and Walkers as Cayman law counsel. The debtors have retained FTI along with Alan Tantleff as CRO, and Moelis as investment banker. Donlin, Recano is the claims and noticing agent. The case has been assigned to Judge Christopher S. Sontchi (case No. 21-10036).
Background
The group owns a portfolio of 18 hotels in the United States, primarily in corporate, leisure and airport demand locations in the “upper upscale, upscale, and upper midscale market segments,” licensed under premium and “well recognized” American hotel brands through franchise agreements, consisting of 5,418 rooms in eight states. Of the 18 propcos, 15 are debtors and three are not debtors. All of the hotels are licensed through franchise agreements other than the Queen Mary Long Beach in California, which is not branded through any franchise agreement. The Eagle Hospitality Group consists of (i) publicly held Singapore-based Eagle Hospitality Real Estate Investment Trust (the debtors’ nondebtor parent) and (ii) Eagle Hospitality Real Estate Investment Trust’s 38 direct and indirect subsidiaries.
On a consolidated basis, Eagle Hospitality Group’s revenue for the 2019 fiscal year was approximately $51.6 million.
Eagle Hospital Group’s hotels were valued at $726.9 million ($645.9 million with respect to the debtor propcos’ hotels) on an “as is” basis and $899.6 million ($776.4 million with respect to the debtor propcos’ hotels) on a “stabilised basis” (on a post-Covid-19 basis) as of an Aug. 31 valuation from Colliers International Consultancy & Valuation (Singapore) Pte. Ltd.
The following table describes each of Eagle Hospitality Group’s 18 hotels, of which all but two are closed:
In connection with unlawful detainer actions commenced by Eagle against the master lessees, the status of the actions underlying the seven properties of which Eagle does not yet have control is shown below:
The debtors say that the actions of the master lessees have caused “significant issues” for the franchisors branding Eagle hotels, and “each and every'' branded hotel received notices of default and termination from the relevant franchisors as a result of the master lessees’ failure to cure defaults for nonpayment of fees and other amounts due and owing. These defaults began before the onset of the pandemic-impacted travel and the economy at large, as certain hotel managers indicated that their decisions to close the hotels were “based on the failure of the Master Lessees’ to fully fund operating expenses, not that business volumes necessitated closing the Hotels.” The pandemic exacerbated these challenges, the debtors say, noting as an example that under “more normal circumstances,” Eagle might have been able to replace the master lessees with lessees “who would have been eager to operate” Eagle’s “attractive portfolio of Hotels.” The debtors describe the combination of curbed revenue stemming from the master lessees’ failure to pay rent and the pandemic’s downward impact on the supply of interested replacement lessees as a “classic ‘one-two punch.”
Further, the debtors say that while the master lessees have asserted at times that failures to make hotel-related payments were caused by the pandemic, FTI has investigated these assertions and determined that the master lessees’ “pattern of disregard for their obligations began well before the full onset of COVID-19 in March 2020 and the beginning of the Master Lessees’ rent defaults with respect to January 2020 rent, and in fact dates back to 2019.” In addition, statutory lien amounts between the debtors and nondebtors with respect to litigation across the portfolio of hotels total $2.8 million (of which $2.79 million relates to debtors and $50,000 relates to nondebtors). The debtors state the Eagle disputes its liability under “many of these claims,” lamenting that as the owner of the hotels, it has inevitably been targeted by claimants and forced to defend itself in numerous legal disputes, “thus paying the price for others’ failure.”
Estimated property-related claims asserted against the debtor and nondebtor propcos due to the master lessees’ defaults are shown below:
Among the “troubling conduct uncovered by the CRO’s investigation,” the debtors allege that Woods and Wu, on behalf of both the applicable debtor propcos and master lessees, entered into a total of six separate nondisturbance agreements with hotels in Dallas, Atlanta, Denver and New Jersey, in which the propcos guaranteed all of the master lessees’ obligations under related hotel management agreements. The propcos also guaranteed the repayment of approximately $6.1 million of “key money” paid, or to be paid, by the hotels to the master lessees as an incentive to enter into those hotel management agreements.
The debtors estimate that as of the petition date, there is a total of approximately $24.9 million of unmet master lessee obligations under the various hotel management agreements. Also, as a result of these guarantees of the hotel management agreements by the debtor propcos, the debtors estimate that they owe approximately $6.1 million in key money.
The investigation also found alleged irregularities with the conduct of Wood and Wu in connection with their control and management of one of the debtors’ most valuable hotels - the Queen Mary Long Beach - a repurposed ocean liner, leased by the debtors under long-term leases with the city of Long Beach. The Queen Mary is also sublet to a master lessee under one of the master leases.
From the investigation, the CRO discovered that Woods submitted an unauthorized loan application on behalf of debtor Queen Mary Propoco under the Paycheck Protection Program under the CARES Act for approximately $2.3 million, which remains in dispute. The master lessee under the Queen Mary lease defaulted on its obligations under the ground leases.
The CRO investigation remains ongoing into the past transactions undertaken by Woods and Wu.
As the EHT’s stapled securities are publicly listed on the Singapore exchange, the Eagle Hospitality Group is subject to “significant oversight” by Singapore Exchange Securities Trading Ltd., or SGX, including disclosure requirements and other regulatory frameworks.
In the months leading up to the bankruptcy filing, the Eagle Hospitality Group issued required Singapore public reports related to its financial situation and updates regarding defaults and the CRO’s investigation. Following inquiries from Monetary Authority of Singapore, or MAS, and SGX regarding the disclosures, the Commercial Affairs Department of the Singapore Police Force announced the commencement of a joint investigation into the then current and former directors and officers of EH-REIT and Eagle Hospitality Business Trust in connection with “suspected breaches of public disclosure” in June 2020.
The Eagle Hospitality Group “understands” that in October, as part of the ongoing investigation, all of the then current and former Singapore-based directors of the former REIT manager and the BT-Trustee manager were arrested and released on bail on reasonable suspicion that certain provisions of the collective investment scheme under the Singapore securities laws were breached. At the end of December, in accordance with a directive issued by MAS, the former REIT manager was removed.
EH-REIT and the REIT trustee continue to cooperate with the MAS investigation and have accepted all directives from MAS and SGX, including providing additional information, according to the first day declaration.
The corporate organizational structure is shown below:
(Click HERE to enlarge.)
The debtors' largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| Lodging USA Lendco LLC2
c/o ASAP International Hotel LLC |
Pasadena, Calif. | Loan | $ 89,000,000 |
| Crestline Hotels & Resorts LLC | Fairfax, Va. | Hotel Management | 5,750,000 |
| Aimbridge Hospitality LLC | Plano, Texas | Trade | 3,475,764 |
| Intercontinental Hotels Group | Atlanta | Trade | 3,257,449 |
| Evolution Hospitality LLC | Plano, Texas | Trade | 2,067,427 |
| Marriott International | Bethesda, Md. | Trade | 1,733,018 |
| Sentry Control Systems Inc. | Van Nuys, Calif. | Trade | 811,491 |
| Hilton Worldwide | Chicago | Trade | 778,533 |
| Hospitality Staffing Solutions LLC | Atlanta | Trade | 657,424 |
| Kaiser Foundation Health Plan | Los Angeles | Trade | 554,252 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | Luc A. Despins | Paul Hastings | New York |
| G. Alexander Bongartz | |||
| Debtors' Co-Counsel | Seth Van Aalten | Cole Schotz | Wilmington, Del. |
| G. David Dean | |||
| Justin R. Alberto | |||
| Debtors' Singapore
Counsel |
N/A | Rajah & Tann | N/A |
| Debtors' Cayman
Islands Counsel |
N/A | Walkers | N/A |
| Debtors' CRO | Alan Tantleff | FTI Consulting | Singapore |
| Debtors' Investment
Banker |
N/A | Moelis
& Company |
N/A |
| Debtors' Claims
Agent |
Nellwyn Voorhies | Donlin, Recano
& Company |
Brooklyn, N.Y. |
| Co-Counsel to the
Prepetition Agent |
Tom Fileti | Morrison
& Foerster |
Los Angeles |
| Co-Counsel to the
Prepetition Agent |
Jennifer Feldsher | Morgan, Lewis
& Bockius |
New York |
| Counsel to Prepetition
Lender Deutsche Bank |
Howard S. Beltzer | Norton Rose
Fulbright |
New York |
| Eric Daucher | |||
| Co-Counsel to the
DIP Lenders |
Gabriel Morgan | Weil, Gotshal
& Manges |
New York |
| Chase A. Bentley | |||
| Co-Counsel to the
DIP Lenders |
N/A | Morris, Nichols,
Arsht & Tunnell |
Wilmington, Del. |
| Counsel to the
DIP Agent |
N/A | Covington &
Burling |
N/A |
| U.S. Trustee | Richard L. Schepacarter | Office of the U.S.
Trustee |
Wilmington, Del. |
DIP Financing Motion
The debtors request up to $100 million in superpriority senior secured DIP financing based on a commitment letter and term sheet from funds managed by or affiliated with Monarch Alternative Capital, with an additional $25 million available to the extent that the debtors reopen one or more existing hotels during the bankruptcy case. Wilmington Trust is the DIP agent. $40 million would become available on an interim basis. The commitment letter includes a “no-shop” provision regarding DIP financing as required by the DIP lenders, but the debtors may respond to unsolicited proposals. The debtors say that they expect to file a DIP credit agreement in advance of the interim hearing.
The borrowers under the DIP facility would be USHIL Holdco Member LLC, Atlanta Hotel Holdings LLC, ASAP Salt Lake City Hotel LLC, Sky Harbor Denver Holdco LLC, Eagle Hospitality Trust S1 Pte. Ltd., and Eagle Hospitality Trust S2 Pte. Ltd.
The debtors stress that they chose the DIP lenders because the proposed DIP financing is “no more expensive than the other offers, while affording the Debtors more control of their chapter 11 cases (including through such provisions as more flexible milestones and less restrictive events of default, and no ‘roll-up’ of prepetition debt).”
Further, as the “DIP Lenders accepted a collateral package consisting largely of previously unencumbered assets, the Debtors are able to avoid a priming contest with their Prepetition Lenders.” The DIP collateral consists of 15 properties, as listed HERE, consisting of 15 previously unencumbered hotels (or, in the case of the Queen Mary Long Beach hotel, a lien on the proceeds of the Queen Mary Long Beach hotel lease). The DIP collateral is not prepetition facility collateral, and the DIP collateral also excludes liens on avoidance actions and their proceeds.
The debtors also say that they do not need to use the prepetition lenders’ cash collateral, therefore avoiding a dispute over the need for, or sufficiency of, adequate protection. The debtors reserve rights as to whether any funds are cash collateral.
The DIP financing bears interest at L+6.75% (subject to a LIBOR floor of 0.5%), with an additional 2% for the default rate, and matures 12 months after the closing date, 45 days after entry of the interim DIP order if the final order has yet to be entered or other customary events. The DIP proceeds would provide funds for operating expenses and “the Debtors’ restructuring efforts, including the marketing and sale of substantially all of their assets.”
The facility includes an original issue discount of 1% and an annual administrative agency fee in an amount to be agreed upon (not to exceed $100,000).
In support of the proposed DIP financing, the debtors filed the declaration of CRO Tantleff, who states that the debtors have “minimal cash available to maintain current day-to-day operations and currently project that they already have insufficient available cash to fund their working capital,” and that the debtors will require “as much” as $10 million prior to entry of the final order.
Lawrence Kwon, managing director of Moelis & Co., the debtors’ investment banker, also submitted a declaration, stating that after out-of-court restructuring efforts failed, he requested that the preposition lenders make a DIP financing proposal, after which the prepetition administrative agent provided a proposal. “The Debtors and their advisors ultimately determined that the proposed DIP Lenders’ proposal was the most viable option,” Kwon adds. The declaration continues that the debtors will not be obligated to pay any exit or backstop fee and there are no prepayment penalties “in the event the Debtors wish to refinance in the future.”
In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The carve-out for professional fees is $2.5 million. For purposes of the carve-out, professional fees would exclude any success, transaction or financing fees required to be paid to any retained investment banker, which fees may not exceed $10 million in the aggregate.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
- Bid procedures deadline: April 17 (90 days after petition date).
- Sale order: Entered by Oct. 14 (nine months after petition date).
- Sale closing deadline: Jan. 12, 2022 (12 months after petition date).
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for joint administration
- The cases will be jointly administered under case No. 21-10036.
- Motion to perform under current hotel caretaker agreements and pay related prepetition claims
- In April and May 2020, in connection with the closure of the closed hotels, the applicable debtor propcos entered into hotel caretaker agreements with certain hotel operators so as to ensure that basic and limited safeguard services are provided at the closed hotels to prevent waste and material damage. The debtors seek to pay caretaker claims up to $2.5 million, of which up to $100,000 “may” be used to pay caretaker claims against the nondebtor propcos. The 10 caretaker bank accounts contained $550,000 as of the petition date, and the motion says that these accounts are purportedly subject to a security agreement with the debtors’ prepetition lender group and are subject to set-off claims. “If the hotel caretakers (including the operator of the now-open Hilton Atlanta Northeast) are denied access to these funds, the Debtors will need to provide an additional approximately $550,000 to fund hotel operations,” the debtors say.
- Motion to use cash management system
- The debtors and other members of the Eagle Hospitality Group have bank accounts with several institutions, including Bank of America NA, Banc of California, DBS Bank Ltd. (Singapore), DBS Bank (Hong Kong) Ltd., Wells Fargo Bank NA and Wells Fargo Commercial Mortgage.
- Motion to restate and enforce worldwide automatic stay, anti-discrimination provisions and ipso facto protections of the Bankruptcy Code
- Motion to provide utilities with adequate assurance
- Motion to authorize CRO Alan Tantleff to act as foreign representative
- The debtors request that Tantleff, in his capacity as CRO, act as the foreign representative of the debtors and seek recognition by the General Division of the High Court of Singapore.
- Motion to file consolidated list of creditors
- Application to appoint Donlin, Recano & Co. as claims agent
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