African hotel deals might change amid partner jitters
 
African hotel deals might change amid partner jitters
27 JULY 2020 8:09 AM

Optimism for hotels in Africa comes from new options and flexibility with financing, including assistance with debt repayments, new cash flows and improved relationships between bankers, owners, brands and operators.

GLOBAL REPORT—Hotel-finance bankers in Africa are not rushing to close properties and cut their losses, sources said.

The survival of hotels helps their survival, too, and offloading hotels in Africa is not the easiest endeavor at the best of times.

One change likely coming, given the signs that some operators are walking away from owners, is that hotel deals may need to be restructured with more emphasis on responsibilities, returns and what each side can do to break or change contracts.

Speaking on a virtual panel titled “What are the banks doing?” during the Africa: Hospitality Tomorrow online conference, panelists said there is no bank in any market that would focus on businesses that were unlikely to survive even if extra liquidity could be provided.

Betty Korir, CEO of Nairobi-based Credit Bank Ltd., said as with other markets, hotel health is dependent on cash flow.

“That is the first criteria, and then to be profiled and appropriate funds correctly. We have to start making plans where (hotels) are in a position to pay down their debt. We can help by giving them, for example, reprieves in terms of interest repayments,” Korir said.

She said the main thing to avoid is increasing debt to equity ratios, in which businesses would become less viable.

“If you look at (the situation) too critically, you would not be able to service anyone at all. It is all about providing working capital and managing carefully when the economy does get a little better,” she said.

There is not only commercial-bank help. More comes from regional and international credit facilities, panelists said.

Ifeoma Ezeokafor, principal investment officer and regional sector lead, tourism, retail and property investments, sub-Saharan Africa, at the International Finance Corporation, said she focuses on opportunities that would create new jobs and support the value chain. Her firm is a sister division of the World Bank focused on private-sector development in developing countries.

She said the financing world in Africa realized the need to move swiftly to address the challenges of COVID-19.

“Our idea is never to just look for profit, but for development. What is important is to respond quickly. Some (hotels) will close down, some will be insolvent and some will be solvent if we can provide liquidity support,” she said.

“Our objective is to cushion the effect of the crisis and not to allow countries to face the full crisis of the economic fall. By June, we had deployed $650 million, and we can support a client with as little as $1 million. This is debt financing, with the hope economies start to recover,” she said.

“Put something in place that will get us all to the end of the year, and then restructure the loan and in digestible doses,” she added.

Moderator Gillian Saunders, director of Johannesburg-based Gillian Saunders Consulting, said African banks will always have a few hotels that need special attention, but hand-holding has now been extended to all.

“Not often does everyone feel sorry for the banks,” she said.

Banks themselves are getting assistance in the form of loan-guarantee initiatives.

Abraham Muthogo Kamau, CEO of Miradi Capital, also based in Nairobi, said “there are few banks who want to take additional exposure in the hotels and hospitality business, but those with a long-term view are able to get good deals. There is hope, and the government is behind this in most countries. We have to do everything to keep the industry intact.”

Peter Gordon, director of Crest Capital, also based in Johannesburg, said one thing helping the African hotel industry’s cash flow is that there has not been much in the way of capital expenditure in recent years.

He said since the financial crash of 2007 and 2008, companies have focused more on the robustness of their balance sheets.

“It is the (small- and medium-size enterprises) that have suffered the most. If you do not have cash flow, you have to have a new argument with the banks. If you have no cash flow, the banks really have to say no,” he said.

“It is possible to get arrangements on trade finance or project finance, and not too obsessed with the robustness of the P&L. Banks globally, but especially in Africa, are used to offering money on project finance,” Gordon said.

He said the distressed debt market requires different skills and parameters and will move at a different speed.

“Cash flow has to be allowed to grow with as little pressure as possible. Stress test and look at historical cash flow and debt levels. Of course, the owner’s cash flow is completely dependent on the operator’s business practice,” Korir said, adding she has seen operators walking away in recent months, “even from some pretty iconic hotels.”

Kamau said he has seen evidence of this, too.

“Previously, lending to a business, banks get a lot of comfort from the cycle, but you are seeing operators walk away. We will have to pay less attention to the operator and rework how we assess hotel deals, but I see optimism.

“I see more deals coming through, but the owner-investor-operator relationship might need to be reassessed, the balance of power or responsibilities,” he added.

The continent is displaying other signs of optimism, panelists said.

“There is more appetite now than before to finance acquisitions. We used to ask what is the value-add, but we are wondering what does that mean now?” Ezeokafor said.

She said prior to the crisis, her organization was focused on direct capital finance but now is willing to work with intermediaries.

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