Fitch Ratings-New York-08 February 2016: Hotel owners will encounter a more challenging debt financing environment during 2016 as lenders respond to the broad repricing of risk (higher) across most debt capital markets and new regulations, says Fitch Ratings.

'Borrowers can expect higher interest rates and tighter underwriting standards for loans backed by hotel collateral as lenders adapt to more challenging debt capital markets conditions,' said Stephen Boyd, Director of Lodging and REITs at Fitch.

Sponsor quality will distinguish hotel debt capital access for the balance of this upcycle. 'Unlike loans made earlier in this recovery, lenders can no longer rely on the rising tide of hotel fundamentals to offset poor credit decisions,' said Boyd.

Basel III regulatory requirements will continue to temper hotel development growth at the margin. Commercial banks have curtailed their development lending activity due to the high capital charges for so-called high-volatility commercial real estate (HVCRE) loans that apply to many highly-levered development loans under Basel III.

However, alternative capital sources will step-in to fill the void. Fitch expects lodging C-Corps. (i.e. brand owners) to increase the pace of their management and franchise (M&F) investments to use their balance sheets to support unit growth, as the cost of development financing increases and availability decreases.

Alternative lenders (i.e. private equity, hedge funds and mortgage REITs) specializing in mezzanine debt and preferred equity will play an increased role in hotel financing this year. Shadow banks are uniquely well positioned to solve hotel financing challenges given their greater flexibility than commercial lenders to take down the entire debt stack and sell off the senior piece of debt while retaining the riskier, higher return mezzanine portion.