CHICAGO - The owners of St. Louis' convention center hotel complex defaulted on a $3.5 million debt service interest payment due this week on $98 million of senior-lien revenue bonds, although investors holding a majority of the debt have approved the distribution of $500,000 in reserves to partially cover the $1.57 million shortfall.

Trustee UMB Bank NA alerted bondholders of the event of default in a Dec. 17 notice after the full payment was not made on Monday. The formal deadline to cover the shortage, however, was yesterday.

A group of investors holding the majority of bonds on Tuesday directed UMB to distribute $500,000 from a $1.9 million debt service fund to holders. That distribution is expected to take place Jan. 8.

Marriott Corp., which operates the hotel complex, reported in a Dec. 10 teleconference call with bondholders that a $2.6 million shortfall is expected in the next interest payment, due in June. It's too early to gauge the hotels' financial performance next year and its impact on next December's payment, said general manager Robert Bray.

UMB set up the call with bondholders ahead of the payment's due date at the request of project developer Historic Restoration Inc. and Marriott after their disclosure of the expected shortfall in the payment due Dec. 15.

The hotel operators said they expect the local lodging market to continue its downward trend for at least two years. A net profit is expected of just $1.4 million this year, down from $3.8 million last year, and $5 million in 2007.

HRI earlier agreed to cover a $2.2 million shortfall in the last payment due in June as part of a deal struck for HRI to purchase the majority ownership in the project owned by Kimberly-Clark Corp. HRI currently acts as a managing member of the group - known as Gateway Hotel Partners LLC and Gateway Tower Partners LLC - but it was Kimberly-Clark, through its subsidiary Housing Horizons LLC, that originally held a majority stake of 85%.

Housing Horizons had previously covered the debt service shortfalls. Kimberly-Clark had significant incentive to subsidize the shortfalls as it received tax credits that exceeded its extra support for the project. Those credits ended this year.

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 at 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 revenues have failed to meet projections after a convention slump following the 2001 terrorist attacks

The notice this week reported that trustee officials had been in contact with city officials and that the trustee "may be asking for their assistance in the future." Specifics on what type of assistance might be sought were not mentioned. The city has also requested that businessman Steven Stogel rejoin efforts to find a permanent solution for the hotels' financial situation. He had previously sought private investors or a restructuring.

The trustee also reported that it was considering three proposals from five it received from consultants to advise on various issues including hotel operations, management, marketing, and a possible debt restructuring or recapitalization. Once named, the chosen adviser would be asked to submit a report within 30 to 60 days.

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