Japan's struggling hotel sector has begun to turn to securitization as a way of lifting itself out of the doldrums. Several hotel groups have begun to talk to bankers about possible deals, with the hotel arm of All Nippon Airlines leading the way.
ANA has announced plans to securitize 10 of its 28 hotels, starting with a transaction backed by the company's flagship property, ANA Hotel Tokyo. That deal is scheduled for the first half of next year and is expected to raise about 70 billion ($657 million), a company official confirmed.
It will be followed by further deals over the next five years, as ANA struggles to cope with significant losses, both in the hotel business and from the airline itself.
In the last financial year, the company, Japan's second biggest airline, lost a reported 65 billion, with the hotel business responsible for just under half of the red ink.
If the deal makes it to market, it will represent the opening up of a new asset class in Japan and could be the start of regular hotel-backed issuance. Certainly, if it follows the pattern set by CMBS in the office and retail sectors, a deal could well open the floodgates to an exciting market.
However, there are many problems to be overcome before that happens, CMBS experts warned.
Perhaps the most significant of those is the lack of available data with which to analyze the Japanese hotel market. Because the hotel industry in Japan has historically been slow moving and has seen little selling of properties there is a lack of benchmarks for market participants to work with.
This makes it tricky for hotel owners to have a clear idea of the value of their properties, for bankers to know how to price hotel-backed debt and for investors to make informed investment decisions.
But the problem goes beyond benchmarking. Indeed, even the hotel management itself often has little idea of the nitty-gritty of the performance of their properties, said Nobushige Yukumatsu, a manager in an Arthur Andersen subsidiary that follows the hotel industry, speaking at a IMN/Fabozzi conference held in Tokyo recently.
For example, the management may not know the profitability of each unit in a hotel, such as a restaurant, a conference facility or individual rooms. If the management doesn't have that kind of information, how can investors make clear investment decisions, Yukumatsu asked?
The lack of data also causes problems for the rating agencies. Another conference speaker, EJ Park of Moody's Investors Service's Tokyo office, explained that it was not even possible to have a clear idea of an appropriate level for hotel management fees, a vital factor in rating a transaction. It was possible to get data from the U.S., she acknowledged, but said that it was not clear how applicable it was to Japan.
Despite such difficulties, experts were agreed that the fundamentals of the industry are likely to lead to further issuance. For one thing, Japan's weak economy has left many hotel groups struggling and led to the April bankruptcy of the Dai-Ichi Hotel, one of the major hotels in Tokyo, which collapsed after banks refused to restructure loans worth 2 billion. The on-going recession also means that hotels can no longer rely on the profitable corporate or bridal markets to make up for losses elsewhere.
Experts said that this will spur securitization in several ways. First, it will encourage hotel owners to be more realistic about the value of their properties and, second, it will force them use their assets to raise cash.
It should also lead to increased professionalism in the sector, with a greater instance of management being separated from ownership and an increasing focus on a hotel group's core assets.
Recent changes to the Japanese accounting system, which have forced businesses to mark to market, have taken away a significant disincentive to securitize, as it has in other CMBS sectors, as companies now have to account for losses on their property portfolios, whether they securitize or not.
All told, said Lawrence Vogler, a senior managing director of HI Group, once the first deal overcomes these obstacles, there is a good chance that it will spur the development of a significant new asset class in Japan.