CHICAGO - Moody's Investors Service this week downgraded to Ca from Caa2 its rating on $98 million of St. Louis convention center hotel bonds, saying bondholders who now own the hotel will likely take a loss on their investment.

The hotel complex - made up of the Renaissance Grand Hotel and Suites Hotel - continues to perform poorly in the current economy, and it is unclear how much bondholders would recoup if they to sell the facilities.

The latest projections show the hotels falling into a deeper financial hole than expected just a few months ago as the faltering economy hurts convention and tourism business. Analysts factored in the complex's poor financial performance in the downgrade and their belief that the "recovery value of the hotel will likely be lower than the outstanding Series 2000A bond balance."

Investors initiated foreclosure proceedings against the hotel in January after the obligated group defaulted on the December debt service payment. Hotel revenues fell about $1.57 million short of the full $3.5 million interest payment owed on Dec. 15.

The hotel developer and now lead member of the obligated group - Historic Restoration Inc. - late last year asked bondholders to hold off on foreclosure, but they refused. Bond trustee UMB Bank NA was the sole participant in an auction of the hotel last month, bidding the full principal amount of $98 million outstanding on the 2000 bonds.

UMB has been working with consultant Jones Lang LaSalle Hotels on an operating and financial plan for the hotel. The hotel remains open for business and Marriott Corp. continues to operate it.

The managers expect to generate an operating surplus of just $650,000 this year, although that figure reflects revenue projections before proposed cost reductions are made. The occupancy rate in 2009 is expected to decline to 58.7%, compared to the prediction of 60% in November.

Moody's wrote: "The hotel's financial performance will continue to remain highly stressed, given the economic downturn, slowing convention center sales, and new or recently renovated competitive hotel supply."

In addition to economic factors, convention business has declined locally in recent years due in part to American Airlines' decision to eliminate the former TWA hub at Lambert-St. Louis International Airport.

A shortfall in June's debt service payment was covered by HRI, which purchased a majority ownership in the project originally owned by Kimberly-Clark Corp.

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 but fell into junk bond territory as revenues failed to meet original projections. Moody's last rating action was in 2005 when the Caa2 was assigned.

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