Chairman appeals for cooperation of all concerned – specially govt.

Unscrambling the scrambled Hilton egg


Hotel Developers (Lanka) PLC, the owners of the Colombo Hilton Hotel, has paid management fees and other group charges to Hilton Worldwide of Rs.1.37 billion from 2001 to 2010 and this amounts to approximately 33% of the gross operating profit for this period, Mr. Thirukumar Nadesan, the company’s chairman has told shareholders in its just released annual report for 2010.

The shareholders meanwhile have got nothing although the HDL share continued to trade last week at Rs. 130 on Friday on the default board of the CSE.

The company will hold an AGM for the first time after 10 years on November 21 when shareholders will be asked to separately approve the annual report of the board of directors, statements of accounts and balance sheets of the company from the years ended March 31, 1990 to March 31, 2010.

This meeting will also consider any other business of which due notice has been given.

The Secretary to the Treasury with approximately 29.4 million shares of Hotel Developers controls 64.98% of the company with the two Japanese shareholders, Taisei Corporation and Mitsui & Company with 13.14% each, control the majority of the balance.

Takashimaya Co. Ltd. owns 1.22% while all other shareholders individually have les than once percent.

According to the information published in the annual report now with shareholders, Cornel & Company are not among the 10 major shareholders although Mr. Cornel Lionel Perera and his wife, Mrs. Theresa Patricia Perera, own one HDL share each.

Analysts said that substantial shareholdings of Cornel Perera had been pledged against the state settling dues falling under government guarantees and the Secretary to the Treasury holds these shares. Perera claims to be the owner of these shares though not the holder.

Five cases filed since 1998 by Cornel & Co., Nihal Sri Amarasekera and the Colombo Municipal Council are complicating the affairs of the owning company with Nadesan saying in the annual report that he was appealing to shareholders, particularly the Government of Sri Lanka, to assist him and his board "to resolve all the outstanding issues and take the company forward."

Nadesan and five other directors of the 10-member board are government nominees. Cornel & Company has two nominee directors and Mitsui and Taisei one director each. This is in terms of the Articles of Association of HDL.

Nadesan said that the company had a stated capital of Rs.452 million, reserves of Rs.5.077 billion and accumulated losses of Rs.10.302 billion in its books as at March 31, 2010.

The reserves include revaluation reserve of Rs.4.706 million resulting in the revaluation of the building carried out in 2010. Accordingly, the net assets of the company amount to a negative Rs.4.773 billion.

Nadesan identified the following factors contributing to the loss:

(a) The construction of the hotel was fully financed by obtaining a Japanese Yen loan from the Japanese investors, namely Mitsui and Co. Ltd. and Taisei Corporation of Japan under a government guarantee.

(b) The downturn in the tourism industry resulting from the 30 year internal war, had a negative impact on the business of the hotel.

(c) The competition in the hotel industry due to declining tourist arrivals and the fact that the minimum room rate policy did not materialize, had led to under cutting which resulted in a severe impact on the profitability of the hotel.

(d) The exchange loss resulting from the repayment of the Yen loan during the period 1990 to 2010 alone was Rs.4,618 million.

(e) The management fees and other group charges paid to Hilton Worldwide is approximately 33% of Gross Operating Profit. From 2001 to 2010, the total amounts paid to Hilton Worldwide was Rs.1,371 million.

(f) The company was unable to meet the annual loan installments and the shortfall had to be financed by the Government of Sri Lanka under the Government Guarantee. Accordingly the liability to the Government of Sri Lanka as at 31st March 2010 was as follows:

Capital Rs. 3,950 Mn.

Interest Rs. 6,248 Mn.

Rs.10,198 Mn.

The company had been unable to meet its annual loan installments and the shortfall had to be funded by the government under the government guarantee that was given to the hotel project. The company’s liability to the government as at March 31, 2010 was approximately Rs.10.2 billion.

"The interest paid on the Japanese loan obtained in 1984 for the construction of the hotel and the loan obtained from the Bank of Ceylon in 1998 for the re-construction of the hotel following the bomb blast in 1997 at the Galadari car park and the interest payable to the Government of Sri Lanka on account of the loans obtained for the settlement of the Japanese loans under the guarantee, as at March 31, 2010 was Rs.9,003 million. These loan interest charges together with the exchange loss amount to Rs.13,621 million and this had been the major factor for the loss situation," Nadesan said.

"It would be observed that the serious loss of capital situation had been there even before the enactment of the Companies Act No.7 of 2007 and the need to take steps in terms of Section 220 of the Companies Act No.7 of 2007 was also a debatable legal issue."

He said that the only option available to change the current loss situation to a profit situation is through company restructuring with the support of all parties concerned.

"Various cases pending in courts have prevented the restructuring process despite the intervention of the Supreme Court to bring about a negotiated settlement in 2005 to facilitate the restructure," he said.

He was hopeful that the revision of minimum room rates, increased tourist arrivals, improving occupancy levels of the hotel and negotiations with Hilton Worldwide to reduce management fees and other group charges would improve the situation.

"Discussions are being continued with the Government of Sri Lanka with a view to restructuring the company and to overcome the debt burden and interest commitment, and also to resolve the issue relating to lease of the property on which the hotel stands. (Of course, certain decisions have to be in line with the government policy and the applicable laws and hence those are beyond our control)," he said.

Among the cases pending is one filed by Mr. Nihal Sri Amarasekera, owning 70,000 shares, calling for the winding up of the Hotel Developers with the case fixed for written submissions on November 28 and with the inquiry into the application should be disposed of by way of written submissions or oral submissions. The company is opposing the winding up.

The case filed by the Colombo Municipal Council relates to the Hilton being operated in 2007 without a trade license and not paying the trade license duty.

Hotel Developers has also initiated a request for arbitration to the International Court of Arbitration in March 2008 against Hilton International of the USA relating to the matter of the "term" of management of the Hilton Hotel Colombo, in terms of the provisions of the management agreement between the company and Hilton International.

The report says they are in negotiation with Hilton Worldwide (formerly Hilton International) "for an amicable settlement of the matter" and the arbitration is pending on HDL initiative.

Both in the financial years 2009 and 2010 the company has posted gross profits of over Rs.1 billion but very heavy finance costs exceeding Rs.1 billion in both years had driven the bottom line into the red.

The directors of the hotel are: Government Nominee Directors – Mr. Thirukumar Nadesan (Chairman), Mr. K.V. Nihal Jayawardene, Mr. V. Kanagasabapathy, Mr. N. Warusawitharana, Dr. Tissa Wickramasuriya and Mr. Kosala Wickramanayke. Cornel & Co. Ltd Nominee Directors – Mr. Cornel L. Perera and Mrs. Theresa P. Perera. Mitsui & Co. Ltd. Nominee Director – Mr. Shigeyuki Kuroiwa. Taisei Corporation Nominee Director – Mr. Mazato Nakano.

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