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Austin Airport Hotel Hole Gets Deeper After Series of Defaults

Austin Bergstrom International Airport's Hilton hotel faces a deepening financial hole in the wake of a series of defaults on $49 million of revenue bonds, according to a recent audit.

The 265-room hotel's deficit increased in 2009 for the third straight year as room rates failed to keep up with the rising cost of operations and debt service.

Bondholders have not moved to foreclose on the hotel, which was financed with an unrated 1999 tax-exempt bond issue, according to an Austin city official familiar with the situation.

The 1999 bonds, which mature in 2027 with a 6.75% coupon, recently traded at a yield of 12.985% or 962.5 basis points over the Municipal Market Data curve.

With assets declining by $1.3 million to $32 million from 2008 to 2009, the hotel's liabilities climbed $1.7 million to $55.4 million, according to the audit from the accounting firm of Padgett, Strateman & Co.

Auditors attributed much of that expansion in liabilities to a $912,644 increase in senior bond interest and a $1.1 million rise in subordinate-lien debt service.

At the end of 2009, the hotel owed $38 million of senior-lien debt and $11.3 million of subordinate-lien bonds, according to the audit. Wells Fargo is trustee for the bondholders.

The conduit issuer of the tax-exempt debt, Austin-Bergstrom Landhorst Enterprises Inc., has defaulted on interest payments nine times since 2004. Its last default was in April. The hotel has accrued $3.7 million in deferred interest on senior bonds.

For the Oct. 1, 2009, semiannual debt service, only 50% of the bond interest was paid.

The hotel was created from a former military building at the airport, which was Bergstrom Air Force Base before it was closed in 1993.

The Landmark Organization Inc. that proposed the conversion of the base building into a hotel later became FaulknerUSA.

The City Council approved a no-bid contract for the conversion with the stipulation that no other airport hotel would be allowed to compete with the Landmark for five years.

After the terrorist attacks of Sept. 11, 2001, the hotel saw its $2 million reserve vanish as air travel dropped dramatically.

In 2005, Landmark Hospitality LP, the hotel operator, was replaced by Prospera Hospitality, and renegotiated bondholder agreements to ease the hotel's financial crunch. Landmark Hospitality later sued the city for replacing it as operator and settled for more than $1 million.

While city-owned hotels are common at major airports around the country, economic turmoil over the last decade has caused many airport authorities to delay or postpone projects.

Sacramento, Calif., which is planning a $1 billion airport expansion, has decided to eliminate a 185-room hotel atop its terminal building.

Denver, which postponed plans for a Westin Hotel at Denver International Airport for several years, is currently developing plans for the hotel as part of a $1 billion addition of its new South Terminal designed by Spanish architect Santiago Calatrava.

Denver's South Terminal will also serve as a rail station for a new commuter line to built from downtown Denver.