CHICAGO - Investors who hold $98 million of St. Louis convention center hotel bonds took the first step this week toward foreclosing on the property following the obligated group's default on its December debt service payment.

Bond trustee UMB Bank NA stressed that the notice published Tuesday in a local publication is a legal step that gives bondholders the option to foreclose on the property Feb. 2 if no other solution is reached with the obligated group and hotel operators.

"It's a very fluid situation and this is just a legal step. Whether a foreclosure actually happens is unknown at this time," said UMB spokeswoman Pam Blasé.

The notice outlines how the bondholders could auction off the hotel or take over ownership in which case the trustee would likely search for a buyer. "This is just a legal step. The hotel remains open for business as usual," Blasé said.

The St. Louis Convention and Visitors Commission did not have an immediate response.

The notice was published - at http://conventionhotelbondholders.com/docs/Notice%20to%20Noteholders%201-06-09%20(33).pdf - ahead of a scheduled bondholder conference call set for today at 1 p.m. Central Time during which consultant Jones Lang LaSalle Hotels will provide bondholders with an initial report on its work. The firm was hired last month to evaluate the hotels' management, financial prospects, sales and marketing efforts, and debt refinancing or restructuring opportunities.

The foreclosure option was triggered after the obligated group failed to make the full $3.5 million interest payment owed on Dec. 15. Available hotel revenue fell about $1.57 million short of the full payment. Bondholders approved dipping into the remaining $1.9 million in reserves to cover about $500,000 of the shortfall.

The latest projections from hotel operator Marriott Corp. show the hotel falling into a deeper financial hole than expected just a few months ago amid a faltering economy that is affecting convention and tourism business.

The $1.57 million December payment shortfall turned out to be $160,000 more than was predicted in November in the wake of deteriorating group conference attendance numbers. Marriott now believes revenue will fall about $2.6 million short on the next $3.5 million June payment, compared to its prediction of a $2.4 million shortfall last November. The occupancy rate in 2009 is expected to decline to 58.7%, compared to the prediction of 60% last November.

UMB had set up a meeting with bondholders ahead of the December payment's due date at the request of project developer Historic Restoration Inc. and Marriott. At the meeting, bondholders were asked to sign off on a forbearance agreement that would prevent foreclosure. They refused.

The hotel operators said they expect the local lodging market to continue its downward trend for at least two years, with profits falling short of the amount needed for debt service payments. HRI earlier agreed to cover a $2.2 million shortfall in the last June payment as part of a deal struck for it to purchase the majority ownership in the project owned by Kimberly-Clark Corp.

HRI currently acts as a managing member of the obligated group, known as Gateway Hotel Partners LLC and Gateway Tower Partners. But it was Kimberly-Clark, through its subsidiary Housing Horizons LLC, that originally held a majority stake of 85%.

The St. Louis Industrial Development Authority issued the senior-lien revenue bonds in 2000 as part of a complicated financing scheme to acquire and renovate the $266 million hotel complex that serves the city's convention center. The 165-room Renaissance Suites opened in 2002 and the 918-room Renaissance Grand opened a year later.

The bonds initially garnered a low investment-grade rating from Moody's Investors Service, but have since fallen deep into junk-bond territory as hotel revenue failed to meet projections following the convention slump that followed the 2001 terrorist attacks.

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