FUNDS available to Eagle Hospitality Real Estate Investment Trust (EH-Reit) are " depleting&hellip on a daily basis" , as it costs money to maintain and operate the existing hotel properties.

 

And DBS Trustee, which as the trustee of EH-Reit has been saddled with the task of looking after the interests of the various stakeholders of Eagle Hospitality Trust (EHT), said there are few options available.

 

Trading in EHT, a stapled group consisting of EH-Reit and the dormant Eagle Hospitality Business Trust, has been suspended since March last year. The trust no longer has a manager, after the Monetary Authority of Singapore (MAS) ordered the removal of the previous manager in November last year.

 

EH-Reit Trustee, with the help of professional adviser Moelis, had given stapled security-holders of EHT the option of a new manager in December last year. But this was voted down at an extraordinary general meeting (EGM).

 

At the EGM, stapled security-holders were also asked to vote on a voluntary winding up of both EH-Reit and EH Business Trust. This resolution was also voted down, leading some security-holders to question a decision to seek Chapter 11 bankruptcy in the United States for some of the group' s units.

 

But EH-Reit Trustee told The Business Times that without the Chapter 11 filing, the creditors of the various EHT entities would have had the right to foreclose on EH-Reit' s properties. This could have led to " increased legal liabilities against EHT, which would have been even less beneficial to stakeholders" , a spokesperson for EH-Reit Trustee said.

 

Properties held by these Chapter 11 entities are currently up for sale - another point of contention among security-holders, some of whom have suggested that a more opportune moment to sell may occur down the road.

 

EH-Reit Trustee, however, pointed out that the group " does not have the luxury of delaying the sale or restructuring process" as the properties continue to consume cash.

 

The various entities are currently drawing on a debtor-in-possession (DIP) credit facility from Monarch Alternative Capital. Under the DIP facility, Monarch is extending up to US$100 million to the Chapter 11 entities. This facility can be increased to as much as US$125 million.

 

But the DIP facility will mature in January 2022. This means that on top of having a limited runway in terms of total available funds, the clock is ticking for EHT' s caretakers to take action.

 

In addition, a waiver from MAS allowing EH-Reit' s total borrowings and deferred payments to exceed 50 per cent of its deposited property before Jan 1, 2022, and 45 per cent after that date, will end on the earlier of either March 31, 2022, or the date on which the Chapter 11 cases are concluded. As at end-September, EH-Reit' s aggregate leverage already stood at 65.5 per cent.

 

EH-Reit Trustee emphasised that the sale " has not been a rushed process" , noting that Moelis contacted more than 180 qualified parties to solicit their interest in submitting proposals for the restructuring and recapitalisation of EHT and/or the purchase of one or more of the 15 properties in EH-Reit' s portfolio. The process of selling the properties is also " highly competitive" , the spokesperson for EH-Reit Trustee said.

 

In all this, EH-Reit Trustee said it " has not acted alone, but has been working closely with advisers.

 

Moelis, an independent investment bank, is acting as professional financial adviser to the Chapter 11 entities. FTI Consulting, a business advisory firm, is acting as chief restructuring officer overseeing the operational aspects of the Chapter 11 entities.

 

" Given the circumstances and challenges facing EHT, the EH-Reit Trustee stepped up in an unprecedented manner," the spokesperson said.

 

" During the process, the EH-Reit Trustee has gone over and above in its responsibilities as a trustee in efforts to protect the interests of EHT stakeholders."

Observers say typical trustees unlikely to be able to carry out all operational duties of Reit managers

 

EAGLE Hospitality Trust (EHT) has effectively fallen under the " care" of DBS Trustee after its original manager was removed for multiple breaches of the Securities and Futures Act last year and plans to install a new manager did not succeed.

 

Since then, corporate entities under EHT - which is a stapled group comprising Eagle Hospitality Real Estate Investment Trust (EH-Reit) and the dormant Eagle Hospitality Business Trust - have filed for bankruptcy protection in the United States, and one hotel has been sold for US$18 million.

 

However, some unitholders of EHT are getting nervous about some of these moves.

 

A group of some 70 investors claiming to own more than 7 per cent of EHT are currently seeing legal advice about convening an extraordinary general meeting (EGM) to get some answers from DBS Trustee.

 

One of them told The Business Times that selling assets in the current " depressed market environment" is probably not the best alternative for investors. " As retail investors, we don' t understand how (DBS Trustee) reached certain decisions such as filing for bankruptcy protection and speeding up the process of selling the assets."

 

Some observers warn that a typical trustee company is unlikely to be properly equipped to carry out all the operational duties of a Reit manager.

 

" In order to do this, trust companies would have to significantly restructure their operations and beef up their teams. They also would not have the strategic information and networks necessary to manage the Reits well," said Stefanie Yuen Thio, joint managing partner at TSMP Law Corporation.

 

To be sure, the situation at EHT is a rare case, and DBS Trustee had no choice but to step up.

 

After all, the primary responsibility of all Reit trustees in Singapore is to safeguard the rights and interests of unitholders.

 

" In the case of EHT, DBS Trustee (as the trustee of EHT) has the duty to act in the best interests of EHT' s unitholders and will remain responsible for the affairs of EHT, including determining the next steps for EHT," said a spokesperson for the Monetary Authority of Singapore (MAS), when approached for comment.

 

However, some observers say Reit trustees do not have the " overarching powers" to be the guardians of retail investors or the supervisors of Reit managers to ensure they behave and perform legal and contractual duties.

 

" The Reit trust deed and the Reit laws and regulations clearly divide the duties and responsibilities of the manager and the trustee," said Tan Woon Hum, a partner at Shook Lin & Bok.

 

" The trustee cannot manage the Reit, simply because it does not have the powers, capabilities, experience or necessary licence to be a Reit manager," added Mr Tan, who is the head of the law firm' s trust, asset and wealth management practice.

 

Reit managers are required to hold a capital markets services licence. Trustees need to have a trust business licence. Both licences are issued by MAS.

 

In the light of what' s happened at EHT, regulators should perhaps consider modifying the rules for Reit trustees.

 

" Enhancing the laws and regulations for Reits, especially giving the trustee more suitable powers and discretion, would make things clearer," Ms Yuen Thio said.

 

" If situations arise and the Reit trustee needs to step up to take charge of matters, it would create more certainty, avoid unnecessary costs and delays, and allow the relevant parties to move forward to carry out the actions that are required in an efficacious manner," she added.

 

Shook Lin & Bok' s Mr Tan said that in light of recent developments, the Reits' trust deeds should give powers to the trustee to carry out " certain important functions" when the Reit has no manager.

 

" Perhaps, the regulators and the industry can revisit the relevant laws and regulations to see how to fine-tune and improve the laws and regulations to deal with technical regulatory gaps or new and evolving issues as the Reit market grows and develops over time."