Business Context and Reporting Period
This Form 8-K Current Report is filed by Hospitality Properties Trust (noting the metadata reference to Service Properties Trust) for the period ending January 6, 2014. The filing primarily addresses the amendment of the company's credit facilities and a letter agreement regarding security deposits with its hotel manager, InterContinental Hotels Group, plc.
Key Financial Metrics and Debt Structure
- Credit Facilities: The company maintains a $750.0 million unsecured revolving credit facility and a $400.0 million term loan.
- Outstanding Balances: As of the amendment date, there were no amounts outstanding under the revolving facility and $400.0 million outstanding under the term loan.
- Interest Rates (Revolving): Reduced from LIBOR + 130 basis points to LIBOR + 110 basis points.
- Interest Rates (Term Loan): Reduced from LIBOR + 145 basis points to LIBOR + 120 basis points.
- Facility Fee: Reduced from 30 basis points to 20 basis points per annum on total commitments.
- Expansion Option: Maximum combined borrowings may be increased to $2.3 billion under certain circumstances.
Material Changes Versus Prior Period
- Maturity Extensions: The revolving credit facility maturity was extended from September 7, 2015, to July 15, 2018. The term loan maturity was extended from March 13, 2017, to April 15, 2019.
- Cost Reduction: Borrowing costs were lowered for both the revolving facility and the term loan.
- Guarantee Structure: Subsidiary guarantees previously in effect were removed. Future guarantees are now required only if a subsidiary incurs separate debt or guarantees other debt.
- Deposit Agreement: A letter agreement was entered into with InterContinental to address anticipated seasonal shortfalls in the minimum deposit required for fiscal years 2014 and 2015. The minimum deposit requirement is effectively reduced by $2 for every $1 InterContinental funds as a special deposit.
Outlook, Risks, and Contingencies
- Forward-Looking Risks: Continued availability of borrowings is subject to satisfying financial covenants. Increasing the borrowing cap to $2.3 billion is not guaranteed and requires additional lender commitments.
- InterContinental Deposit Risk: InterContinental has advised of possible seasonal shortfalls in the minimum deposit for 2014 and 2015. There is no assurance that InterContinental will be able to fund the full $37 million minimum deposit required starting January 1, 2016.
- Cash Flow Impact: The company notes that applying the security deposit to cover payment shortfalls does not result in additional cash flow, as the funds are already held by the company.
- Covenants: The amended agreement retains covenants restricting debt incurrence and distributions, and includes acceleration clauses for events of default, including a change of control.
Investor Verification Checklist
- Verify the specific financial covenants required to maintain access to the $750 million revolving facility.
- Confirm the status of InterContinental's ability to fund the $37 million minimum deposit required beginning in 2016.
- Review the full text of the Amended and Restated Credit Agreement (Exhibit 10.1) for detailed default provisions.
- Monitor whether the company exercises the option to extend the revolving facility maturity by an additional year.
- Assess the likelihood of obtaining the additional lender commitments necessary to increase the total borrowing capacity to $2.3 billion.