A bank group holding $2.5 billion of loans to Patriot American Hospitality Inc. will be asked to ease repayment terms, the company said Thursday.
The move came after debt-riddled Patriot American said it had hired Chase Securities Inc. and Morgan Stanley Dean Witter & Co. as advisers.
The company said it is seeking to avoid default on about $1.7 billion of term loans it must repay within 16 months. Among the cash-raising strategies being considered are a stock issue, bond debt, sale of assets, or a sale of the whole company.
Patriot American, a real estate investment trust based in Dallas, is carrying $3.8 billion of debt, including the syndicated loan Chase Manhattan Corp. led in July. About 50 banks hold pieces of the loan.
That loan package included an $800 million credit line, of which $787.8 million has been used. In a filing with the Securities and Exchange Commission, the company said its financing costs could substantially deflate fourth-quarter earnings. If that happened, Patriot American would violate the terms of its credit agreement.
A banker close to the deal said Patriot American is just one of several companies struggling to revise short-term loans that were supposed to be paid off through equity or bond issues.
"It's a question of current lenders working with them to get them to capital markets closure," the banker said. "We feel they'll get through this. This is not a dime-store operation. This is a big company with great fundamentals. It's not broken."
Analysts familiar with the REIT agreed. Greg Zappin, an analyst at Standard & Poor's corporate ratings group, said the trust is a healthy business that is growing fast with borrowed money. Patriot American found conditions miserable this fall when it had hoped to refinance its debt, he said.
"It seems the operating part of their business is performing adequately," Mr. Zappin said. "They were growing very rapidly, and a combination of events turned against them."
For example, an unforeseen series of non-market-related events in recent months has worsened Patriot American's cash crunch. On Sept. 22, a hurricane did $30 million of damage to hotels the trust owns in Puerto Rico. Recent federal legislation also wiped out its tax advantage as a paired-share REIT.
The company also ran into trouble with its use of equity forwards, which let Patriot American get cash in lieu of future stock issues. Since the last time it used an equity forward, its share price has fallen about 60%. In effect, the falling price would make the new stock issue much larger than expected and will further dilute Patriot American's equity. The company owes about $313 million for that financing.
"That's a big part of the story," Mr. Zappin said.