GLOBAL REPORT—Hotel lending—what remains of it—will soldier on despite the swirling Libor scandal, financing experts report.
The uproar began a month ago, when global banking giant Barclays was fined £290 million ($453.34 million) by regulators in the U.S. and England amid accusations that Barclays took steps to rig Libor rates. The investigation has since spread to other banking institutions.
Libor, an acronym for London Interbank Offered Rate, is the average interest rate global banks charge each other for short-term loans. It is calculated each business day.
Libor is a key benchmark in loan underwriting, particularly in floating-rate deals, and it is used frequently in hotel loans. Time will tell just how big an effect it might have on the industry, sources said.
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Tino Korologos
Deloitte Financial Advisory Services
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Regardless, the scandal could not have come at a worse time for the hotel sector’s fragile lending scene, said Tino Korologos, managing director at Deloitte Financial Advisory Services. Any further hiccups in the debt markets could potentially affect trillions of dollars in transactions, he said.
“If you look at it from 20,000 feet, the last thing the market needs right now is uncertainty,” he said.
Messages left with lenders who have been actively lending to the hotel sector, according to research from the Hotel Investment Barometer, sister publication of HotelNewsNow.com, were not returned by deadline.
View a list of active U.S. hotel lenders. (Hotel Investment Barometer subscription required.)
Ryan Meliker, senior research analyst at investment bank MLV, said large lenders might pull in the reins as the Libor debate swirls. Smaller banks, however, will be able to pick up the slack.
“The majority of commercial real-estate lenders are not big banks,” he said. “They’re insurance companies and smaller regional banks. They’re not under the same scrutiny that J.P. Morgan and Barclays are.”
Macroeconomic uneasiness grows
During the first four months of 2012, loan-to-value ratios were up and interest rates were stable, Meliker said. But that could change as a result of the Libor investigation, he said.
It’s possible the Libor situation could spook some of the lenders who remain in the financing game, Korologos said.
“I can see companies limiting or reducing business if they don’t get a sense that there’s a robust recovery,” he said.
The result could be a re-pricing of debt to match that uneasiness, he said. “It’s just more noise in the system.”
Global impact
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David Blumenfeld
Paul Hastings
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Any disruption in lending could be particularly problematic in China, where the real-estate market has been gaining strength despite the country’s economic slowdown, according to The Wall Street Journal. In Shanghai, at least, the real-estate market is continuing on as before the Libor dust-up, David A. Blumenfeld, a partner in the Shanghai office of law firm Paul Hastings LLP, wrote in an email.
“The Shanghai real-estate market, as with most of all the real-estate markets in China, is overwhelmingly driven by domestic factors,” he said. “There appears to be very little if any impact on the Shanghai real-estate market.”
Blumenfeld added that “most” of his clients have not noted any changes in the credit market—yet.
“Real-estate secured financings, whether or not they include a hospitality context, generally takes several months to come to fruition,” he said. “There has not been enough time to understand whether there has been an impact on the ability of borrowers to secure loans.
A new benchmark?
Experts were mixed over whether Libor will continue to be used as a lending benchmark in the years ahead.
Korologos and Blumenfeld said they expect Libor will continue to be used in the underwriting process. Korologos said Libor is entrenched in the financing market, and it would be difficult to replace it with another metric.
“I think you would have a lot of challenges to substitute it given all the agreements in real-estate driven by Libor,” Korologos said.
Meliker, however, said he could envision other benchmarks being used to take the place of Libor, which he said the scandal has shown to be untrustworthy.
“There’s been an argument for five years or so as to why we’re using Libor,” he said. “I could see a shift to the U.S. prime rate or federal funds rate or going on a country-by-country basis.”
