Bond-financed hotels take a hit as COVID-19 wipes out conventions
The conventions and meetings that have been cancelled because of COVID-19 are putting pressure on the credit of convention centers and municipal bond-financed hotels built to support them.
S&P Global Ratings has placed the ratings on three U.S. conference center hotel project financings on CreditWatch with negative implications.
Monday's action followed S&P's March 16 downgrade of the Baltimore Hotel Corp.’s senior secured revenue refunding bonds. The rating agency lowered them to speculative-grade BB-plus from investment-grade BBB-minus. They were also placed on CreditWatch with negative implications.
“The common factor that triggered the four rating actions is the COVID-19 pandemic. It is reducing operational cash flows for BHC, Denver Convention Center Hotel Authority, and Austin Convention Enterprises Inc., or leading to potential disruption to the construction of the Greater Columbus Convention Center Hotel Expansion Project,” S&P said.
IHS Markit said in a report on Tuesday that convention center bonds weakened on news of the CreditWatch.
“Both the (Columbus, Ohio) Franklin County Convention Facilities Authority 5% of 2051, BBB-minus rated with 2029 call and the Denver Convention Center & Hotel Authority revenue bonds 5% of 2032, BBB-minus rated with 2026 call weakened to $78.5/6.63% and $94.375/5.63%, respectively, upon review of MSRB trade activity at diminished levels,” IHS Markit stated.
Trade shows began voluntarily pulling business as the outbreak widened over the last month and cancellations were amplified by orders in many states banning large gatherings.
Leisure travel has also ebbed, adding to hotel woes, and how quickly it might return if virus fears persist and if the economy doesn't pick up speed later in the year is unclear.
“The concern over the coronavirus is driving demand for lodging in the U.S. significantly downwards through at least the second quarter,” S&P said. “Moreover, as the coronavirus pandemic escalates and growth heads sharply lower against a backdrop of volatile markets and growing credit stress, we now forecast a global recession this year that complicates the path to recovery. The risks remain firmly on the downside.”
Recent actions also extend to convention center bonds. Moody’s Investors Service revised the outlook on the New York Convention Center Development Center's revenue bonds to negative from stable.
S&P analyst Andy Hobbs said that the convention center hotel deals rated by S&P are coming out of a relatively strong performance over the last several years until early March. “Some of these convention center authorities have been able to build liquidity and put themselves in a good position to be able to manage challenges," he said. "The question then becomes how long?”
S&P’s negative outlook on the Austin Convention Center hotel’s BBB-plus senior secured bonds and BBB-minus subordinate lien came two weeks after the city cancelled its South by Southwest arts festival that has attracted millions of visitors from around the world since 1987. Analysts anticipate a loss of room revenue of $2.6 million in March. Austin Convention Centers Inc. has about $135 million of bonds outstanding for the hotel, which operates as a Fairmont.
“We believe that the hotel would experience further room revenue decline beyond the cancellation of SXSW,” analysts wrote. “And if this downward pressure on room revenue persists beyond the second quarter, it would likely weaken ACE's current credit profile to a possible downgrade.”
The 801-room, 31-story hotel across from the Austin Convention Center opened in 2003.
The Denver Convention Center Hotel Authority's BBB-minus-rated senior revenue refunding bonds would fall to junk if S&P’s negative watch results in a downgrade. The hotel expects losses ranging from $4 million to $5 million in March alone, according to S&P.
The $271.8 million senior revenue bonds issued in 2016 reach final maturity in December 2040 and are secured by the hotel's net revenue and fixed contributions from the City and County of Denver, funded through an annual appropriation.
“If the loss on room revenue continues to escalate beyond the second quarter, we would likely revise our base-case assumption for revenue per available room to reflect our expectation of a slow recovery in the next one to two years, which may further weaken the project's credit profile to a possible downgrade,” S&P analysts wrote.
Support by Denver in the form of annually appropriated payments that cover 50% of maximum annual debt service is a factor in Moody’s Baa2 rating, which carries a stable outlook.
In Columbus, Ohio, the Franklin County Convention Facilities Authority's hotel bonds are also at risk of being cut to junk as their BBB-minus S&P rating is on watch. The authority issued $151 million of bonds secured by the net operating income of the expanded Hilton hotel and local hotel-motel bed taxes to partially fund construction of a new tower for the hotel.
The project is in early stages, and is expected to be completed in January 2022 according to the original schedule. S&P said it could lower the rating on the bonds if COVID-19 materially delays construction beyond S&P’s downside scenario or the creditworthiness of design/builder Turner Construction Company weakens.
“We are focusing on any supply disruptions and the magnitude of any lockdown preventing workers from entering the site," S&P wrote. "We will also continue monitoring the credit quality of Turner, as this constrains the rating on the project.”
Maria Mercurio, chief financial officer of FCCFA, said that through 2022, interest due on the bonds has been capitalized and will be paid with bond proceeds.
“The FCCFA has substantial reserves to protect debt payments due on the 2019 bonds,” Mercurio said. A cash reserve of $1.5 million to meet any construction delays is sufficient to cover close to a seven-month delay.
Mercurio said that the S&P action is not unexpected as the watch was issued as a precaution during a crisis.
“While the FCCFA cannot predict what is to come, we do know that the project is proceeding as originally planned,” Mercurio said. “Currently, COVID-19 has not impacted project schedule or budget. The hotel expansion project is in early stages of construction. If delays should occur in the future, the project has time to accommodate and adjust.”
Mercurio said that while Ohio is under a stay-at-home order issued by Gov. Mike DeWine, the hotel expansion project is exempt and construction is continuing.
Moody's revised its outlook to negative from stable on the Aa3 and A2 ratings of the New York Convention Center Development Corp.'s senior lien and subordinate lien revenue bonds, including its Aa3 rating on State of New York Mortgage Agency bonds that are subordinated to the senior lien revenue bonds and its A2 rating on SONYMA bonds included in the subordinated lien revenue bonds.
“The outlook on the bonds has been revised to negative based on the coronavirus pandemic and its resulting severe disruption in the travel and tourism market,” Moody’s stated. “This will result in sharp reductions in the hotel user fees that support the bonds.”
The New York City Comptroller's Office has projected that the pandemic could result in a reduction in hotel occupancy to 20% through at least mid-summer, although the full duration and extent of deterioration is very unclear at this time.
The corporation, a unit of Empire State Development Corp., was founded to construct the Jacob K. Javits Convention Center on Manhattan’s West Side and coordinate an expansion project at the center.
The Javits Center, stripped of its usual activities, is being converted to a field hospital with 1,000 beds ready to treat non COVID-19 patients, to relieve pressure on hospitals already inundated with demands for coronavirus care. It is one of four such field hospitals Gov. Andrew Cuomo wants created.