Despite a virtual standstill in hotel construction since the early 1990s, Bankers Trust New York Corp.'s securities unit has quietly built a huge business raising capital for hotel companies.
With major construction projects inching forward in several markets, the bank has more than $7 billion of hotel acquisition and refinancing deals under its belt - and it helped set the stage for the sector's rebound.
"The syndication market for hotel transactions had been closed. What Bankers Trust has been able to do is reopen that market," said Daniel B. Hebert, a managing director at BT Securities who specializes in hospitality finance.
As deal flow picks up, lenders are likely to follow the formula that Bankers Trust helped develop to provide financing for hotel industry consolidation - and possibly for new properties.
Officials of the Bankers Trust securities group say their hospitality- industry practice is just the type of relationship banking that new chief executive Frank Newman is emphasizing as he guides the bank away from transaction-oriented derivatives trading.
Many lenders, including Bankers Trust, were badly burned on hotel loans in the 1980s. And those that foreclosed on hotels found themselves saddled with an especially costly, management-intensive form of bad real estate.
The result was that construction lending for hotels ground to a halt. By 1994, when occupancy exceeded the long-term average of 64.6% and the hotel industry was enjoying its second straight profitable year, bankers remained squeamish about committing money to hotel loans.
That was the climate Bankers Trust faced when it came to market in November 1994 with a $230 million revolving bank loan for Host Marriott, which had determined it could buy properties at a fraction of the cost of building them.
"The obstacle was that many lenders were not aware of the recovery of the hospitality industry," said Jacques E. Brand, managing director of BT Securities. "They were burdened by the history of the losses their financial institutions had suffered."
Mr. Hebert said selling hotel deals to upper management at Bankers Trust has posed a similar challenge.
"The senior credit office mechanism at the bank is very involved in the process of approving loans to the hotel industry, and that's not surprising, considering where the hotel industry was in the late 1980s," he said. "Credit officers have been a lot more diligent and a lot more sharp- penciled in making sure these transactions hold together."
Bankers Trust's solution for Marriott, Mr. Brand said, was to underwrite the deal more like a corporate loan than a real estate loan, predicating its size on historical cash flow and the creditworthiness of the sponsor.
The loan amounted to only 40% to 50% of the replacement cost of the hotels, the Bankers Trust officials said, and was secured by a diversified portfolio of properties.
The deal was in sharp contrast to 1980s style lending, in which a developer would be granted 80% or more of the construction cost for one property at a time.
Mr. Brand and Mr. Hebert said their deals are supported by much more comprehensive research on market conditions than was available when the bad loans of the 1980s were made.
The loan was part of a package of nearly $1 billion of financing that Bankers Trust arranged to enable the full-service hotel chain to expand.
In addition to the $230 million credit line, Bankers Trust - which had merged its real estate lending group into its investment bank - acted as co-manager of a $415 million public equity offering for Host Marriott and of an offering of $350 million of senior notes.
The deal led to other assignments.
In 1995, the banking company arranged $270 million of financing for Bristol Hotel Corp. - including a $100 million public equity offering, a $120 million bank loan, and a $70 million private placement of senior secured notes.
This year, the bank acted as co-manager of a $149 million equity offering and a $120 million offering of first mortgage notes, and it arranged a $100 million revolving credit facility for Prime Hospitality.
It also co-managed a $67 million equity offering and $100 million of senior subordinated notes for Wyndham Hotel Corp., while underwriting a $100 million revolving bank loan.
The bank is about to close a $225 million bank loan for Capstar Hotel Co. It arranged $165 million in financing for an expansion of the Boca Raton Resort and Club's conference facilities.
And it is acting as adviser to Loews Corp., which is developing a $125 million, 800-room hotel in Miami using a $66 million construction loan arranged by Bankers Trust and placed with seven banks.
Financial officers at several hotel companies identified the Marriott loan as one that spurred the full-service hotel recovery, which now appears to be moving steadily forward.
A group of banks led by J.P. Morgan & Co., Wells Fargo & Co., Bank of New York Co., and BankAmerica Corp. recently arranged a $1.75 billion loan for Hilton Hotels Corp. for acquisitions and corporate purposes. Bankers Trust is a co-agent in the deal.
A unit of First Chicago NBD Corp. is financing a $108 million Hyatt hotel at McCormick Place, one of several construction projects under way in Chicago.
But hotel managers say the financing market for hotels may have permanently changed from that of the 1980s.
For one thing, they note that lenders insist on recourse to the borrower to secure a loan. And they said that financing for construction is limited to such tourist-oriented markets as Las Vegas and Orlando, or to projects where a municipality is contributing, as is the case with the Loews hotel in Miami and the Hyatt in Chicago.
"We don't think that's going to change for the next several years," said William M. Karnes, chief financial officer at Capstar, which is acquiring hotels at less than 75% of the cost of building them.
But the hotel executives also said the deals are a hopeful sign that the industry will be able to expand to meet growing demand.
Howard Silver, chief financial officer of Equity Inns Inc., said his group formed a real estate investment trust in 1994, when that was virtually the only way for a hotel owner or manager to raise capital for expansion.
Recently, he said, Equity Inns arranged a $130 million revolving bank loan led by Smith Barney and a unit of First Chicago. "Bank financing is starting to open up," he said.
Mr. Hebert agreed that the recent activity "speaks to a market that's reopening." He also said the new corporate structure of hotel financing will provide some assurance that "if there are hiccups in the economy that impact hotels, the banks are well covered."