City loans up to $38M could shield Hilton downtown during convention center closure

An expected agreement between Hilton Worldwide Holdings, the board that manages the city-owned downtown Hilton Austin, and bondholders who financed the hotel will clear the way for the next steps in the expansion of the Austin Convention Center.

Last week, the board for the Austin Convention Enterprises public facilities corporation approved amendments to its agreements with the bondholders and the Hilton parent company that set up financial stopgaps to keep the hotel solvent during the four-year teardown and reconstruction of the Austin Convention Center.

The financial protections will come in the form of three potential loans from the city, totaling $38.75 million. The loans are structured as:

• A $25 million loan specifically to cover shortfalls in payments to bondholders
• A $8.75 million capital loan to cover health and safety needs at the hotel during the four-year period, and
• A $5 million secondary capital loan that has been arranged in the event of an extreme, unforeseen financial emergency.

All of the loans have a 2 percent interest rate and have been discussed with city management. But they would need approval from City Council before the start of the demolition of the convention center in 2025.

Hilton corporate leaders are expected to approve its amended agreement this week, with bondholder approval likely by the end of September.

The potential loan package and amended financial terms became necessary because the bond refinancing agreement completed in 2017 included clauses that triggered default if the convention center – a major source of the hotel’s business – were ever to close. With that financial question lingering, city leaders have paused work to complete contracts for initial engineering and design work on the expansion, which is expected to cost more than $1 billion.

During the meeting, Austin Convention Enterprises board members (including Board President Jimmy Flannigan) said the only loan that is expected to be used is the capital loan that would cover repairs for infrastructure, such as elevators and heating and air conditioning systems.

Flannigan told the Austin Monitor that the modeling and analysis conducted by the Hilton company suggests the hotel will see a 25 percent decrease in bookings while the convention center is closed.

“It is still technically possible that none of these loans will be tapped, because hotel revenue pays for everything first. In the event that the closure impacts our revenue to varying levels, we do expect to fully utilize the primary capital loan,” he said.

He said hotel consultants from the national firm CHMWarnick have never had to help structure a loan package and financial agreements based around the complete teardown of a city’s convention center. He said that the situation was an example of bad timing, due to losses from the Covid-19 pandemic.

“So our reserves were really drawn down in a way that had never occurred before. And then you really don’t see cities demolishing convention centers, you see them expanding or building a new one, but you rarely see a demolition,” he said.

With hotel business around the city experiencing a stronger-than-expected rebound following the pandemic, Flannigan said the Hilton is showing similarly strong performance and far exceeding forecasts for 2022 and 2023. Looking ahead to how the hotel will fare during the convention center work, he said there’s likely to be some shifting of demand by smaller groups and organizations who were previously blocked out because of bookings related to conventions and business gatherings.

“It’s not as simple as how much business did we get from groups using the convention center and then subtracting it from your revenue, because there are many smaller conventions and smaller group business opportunities that downtown hotels have forgone for years because the convention business at the center is better, and they make more money,” he said. “You’re going to lose a significant portion of the business, but you’re also going to get new business that generally doesn’t get to come to Austin.”

Photo by LoneStarMike, made available through a Creative Commons license, via Wikimedia Commons.

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Posted In: Austin, District 9