11 June 2020
Hotels 2.0 – 2 of 2 Insights
In the first instalment of this two-part series, we looked at the challenges faced by hotel owners and their lenders when dealing with defaults in their financing arrangements due to the closure of the sector.
In Part 2, we're going to explore some of the financial support options available to hotel owners, and review the many social distancing-related operational changes being considered by hotels prior to re-opening. The costs of these operational changes will impact profitability and therefore the ability of borrowers to service their debt obligations to lenders.
In assessing the extent of capital available to meet their financial obligations, hotel owners will be keen to utilise any external support available. The UK government has so far announced a number of loan schemes to support businesses experiencing lost or deferred revenues leading to disruptions in their cash flow. These include:
More detailed guidance on the schemes listed above is available here.
Businesses have reported challenges in accessing support schemes given the large influx of applications in a short timeframe, the challenges in lenders conducting appropriate underwriting checks, and issues in interpreting the eligibility criteria in the context of real estate finance structures.
Furthermore, hotel owners may have found themselves ineligible for these schemes due to the turnover of their wider sponsor group being taken into account, which may take them over the turnover thresholds. Where a hotel is subject to high leverage, hotel owners have also faced challenges due to the EU State Aid testing on financial difficulty where accumulated losses are not to exceed 50% of their share capital.
In cases where a hotel owner is seeking a support loan from a lender who is not the lender that financed the hotel (and took security over it), there are also challenges over how to introduce the support loans into the existing structure. This may require consent of the pre-existing lender depending on which group entity is to be the borrower of the support loan.
While all businesses are formulating return to work plans, the extent of the practical challenges involved in re-opening hotels in particular should not be underestimated.
Hotel owners will be focussed on formulating changes to their businesses designed to demonstrate that sufficient social distancing measures are now embedded in the core of the hotel offering.
At the same time, lenders will be conducting a more intensive "deep dive" to assess the viability of hotel businesses as they engage with borrowers to consider the extent of future loan default waivers or relaxation of loan covenants.
The extent to which new business plans now need to provide for additional capital expenditure to implement the requisite changes to hotels will feature in these considerations for borrowers and lenders alike.
Notwithstanding that the summer is likely to involve extremely muted levels of occupancy, confidence-building through clear and demonstrable changes to a hotel's offering will be key. These are likely to include:
Hotels which are particularly reliant on revenue streams from food and beverage and conferences and events will effectively be formulating an entirely new (and untested) business plan which lenders will be cautious to lend against.
In terms of re-engineering hotel operations, this will obviously require additional expenditure in an environment where considerable revenue has already been lost and future projections of revenues remain uncertain at best. This will involve negotiations with franchisors/brands as to the required expenditure and the concerns of brands to ensure hotels are reflecting a new standard of operation.
In some instances, available FF&E reserves may be repurposed to meet these additional costs which may require the consent of all stakeholders depending on the existing documentation.
Much has been written about the likely increase of working from home across many office-based businesses and the resulting decrease in office space requirements.
However, the ability for co-workers to meet in person, hold team-building events and maintain any sort of team culture means that there will remain a need to hold physical gatherings to keep an organisation together. Hotels remain well placed to service this need, and a re-imagined conference and event offering from hotels should be a key component of any revised offering.
It may still be a bumpy ride, but if lenders and borrowers continue in the spirit of collaboration, the path to recovery and profitability will be found, provided they don't miss the ramp up ahead.