Hotels 2.0 – 1 / 2 观点
A number of UK hotels have announced their intention to re-open for business on Saturday 4 July 2020. This is the earliest date that the UK government will permit parts of the hospitality industry to resume business, provided appropriate social distancing measures are implemented.
Although this is a positive step for a sector that's been badly impacted by lockdown, hotel owners and their lenders face considerable challenges, both as they ramp up operations now and over the next 12-24 months, as well. The most pressing of these is re-engineering hotel operations to incorporate social distancing measures while still generating positive cash-flow.
In this first instalment of our two-part series, we'll look at the issues that hotel owners/borrowers and their lenders have had to manage to-date when dealing with defaults in loans secured on hotels.
Borrowers whose loans are secured on hotels have so far largely engaged in a constructive dialogue with their lenders to obtain temporary waivers of loan covenant defaults arising on their latest interest payment dates. However, many participants in the hotels sector do not expect the industry to return to pre-COVID-19 levels of activity and revenue until the latter half of 2021 or later.
The closure of hotels and the resultant loss of income were expected to lead inevitably to defaults of debt finance terms in facility agreements. The nature of these defaults largely fell into two categories: economic defaults (eg non-payment of debt repayments when due and/or a breach of financial covenants) and non-economic defaults (eg a breach of non-financial undertakings, such as cessation of business undertakings).
It's the nature and extent of economic defaults which impacts lenders to a greater extent, and it's these defaults which featured most prominently in the dialogue between lenders and borrowers.
A breach of EBITDA/interest cover financial covenants was also expected and – where debt service payments were still being made (from cash reserves or new equity injections) – lenders were mostly quick to provide temporary waivers pending greater visibility on the extent of the anticipated distress in the sector.
In instances where such waivers were of a short duration (eg one/two quarters), these were designed to provide a short amount of "breathing room" for borrowers while the full extent of the pandemic's impact was assessed. As the scale of the pandemic unfolded and resulted in a closure of hotels, it became clear that obtaining a quarter-by-quarter waiver would not be sufficient. Instead, it was clear that longer-term waivers and loan amendments would be needed to allow borrowers to focus their efforts on ramping up their operations over the next 12-24 months.
It's worth noting that just because some borrowers met their last quarter's debt service payments is no indication that these payments will continue to be made in the future. That will depend entirely on the extent to which borrowers have sufficient cash reserves, a degree of equity support and the expected timeline for a return to profitable operations.
Lenders in turn were keen to ensure that any "Covid waivers" did not act as a blanket waiver for any further distress which may occur, and have been keen to make any such waivers conditional on borrowers continuing to make their quarterly interest payments.
A non-payment of interest by borrowers involved more intense discussions to find a way forward. This is particularly so in situations where borrowers have indicated that no excess capital or equity support is available to them to either make interest payments or to exercise their rights to inject capital to "cure" financial defaults.
In many instances, these discussions remain on-going and go hand-in-hand with longer term waivers/loan amendments where both lenders and borrowers will be seeking a degree of pain-sharing to demonstrate their on-going commitment to the business.
The lack of reports of lenders commencing enforcement action is encouraging. However, it remains to be seen whether this will continue to be the case, particularly given some loans will be due to be repaid during the recovery period and lenders may have their own obligations to their investors/funds which may limit their ability to extend loan repayment dates.
By now, borrowers will have either agreed a "Covid waiver" and loan amendment to cover the next 12-24 months, or they will be in advanced negotiations with their lenders to agree these. The terms of any such waivers will need to remain under active review by borrowers and lenders alike, particularly where waivers are conditional and may result in an earlier termination of the waiver period.
In circumstances where waivers have not been agreed, or are terminated early, lenders with loans secured on hotels will have a range of options available to them. These are typical in commercial real estate loan structures, and include (subject to the exact terms of the finance documents):
It's worth noting that on Wednesday 3 June 2020, the new Corporate Insolvency and Governance Bill was debated in the House of Commons. The impact of this legislation – passage of which looks likely to be expedited – would be far reaching, and is likely to:
Further guidance on the draft legislation is available here.
In the next instalment in our two-part series, we'll explore some of the options which have been made available to hotel owners to provide financial support, and consider the challenges that lie ahead.
作者 Amar Ali 以及 Richard Bursby