Despite the breach, bondholders shouldn’t necessarily lose a lot of sleep over Starwood’s credit situation. Although a covenant violation is never ideal, at approximately 5x leverage the banks will give Starwood an amendment (6th time on this facility) and simply increase their thin credit spread to something more juicy. At our TTM Consolidated EBITDA calculation of $765MM at 3Q09 and only $1.9BN at the bank and secured debt level, the banks are also sleeping well at night knowing that leverage through their paper is only 2.5x.
A shareholder, however, shouldn’t sleep so soundly. If HOT breaches, cost of borrowing will skyrocket and EPS and cash flow will go down, again. The company does have some trophy assets that could be sold but the number of potential buyers has dwindled. It’s not exactly a seller’s market. Buying back discounted bonds is also an option to help de-lever.