The hotel industry is looking for debt to survive the pandemic’s lean months but, as with government help, there will come a time to pay off debt, and every side of the equation hopes to do what is right, sensible and sustainable.
MANCHESTER, England—Hoteliers hope banks will stand behind them through this crisis, but if a hotel owner is new in town looking for traditional debt, there isn’t much room for optimism now.
Stephen Welch, senior relationship manager of hotel finance at Bank Leumi (U.K.), said during an Annual Hotel Conference panel titled “Ending the standoff: Managing the lender-owner-tenant relationship” that there are tensions between lenders and tenants but the origin of stress is completely different than the tensions during the Great Recession.
The pandemic is clearly not the fault of bankers, panelists said, but the banks played a primary role during the last recession and today, the banks’ far stronger balance sheets must be put to use in light of lessons learned between 2008 and 2010.
“All parties are looking to come out the other side of this pandemic,” Welch said.
Diane Scott, senior hotel consultant, Katten Muchin Rosenman, said there are clear differences between the COVID-19 recession and the Great Recession.
“The crisis is not the 2008 financial crisis. This is about hotels not being able to open,” Scott said. “Also, governments can change the (COVID-19) rules, and then the banks have to run to catch up.”
Banks are reacting proactively this time around, too, Welch said.
“Banks with the biggest balance sheets are rightly concentrating on their existing customer base, but on the other side of the coin, smaller banks without the same exposure do have an opportunity to grow and pick up new customers with sensible pricing where a year ago we might not have stood a choice,” he said.
He added he had recently helped finance two large facilities.
“A lot of people are approaching us, but we do not have the bandwidth to do all,” he said. “A 40% loan-to-value does not cut it now. It is about cash flow and relationships.”
But behind all bank help is that additional debt, which at some point still needs to be repaid. Lenders with no or low cash flow have gone to the bank to ask for forbearance, which is sensible, and this additional debt often is backed up with government assurances, sources said.
“A lot has been done by government, but we could say, yes, they should do more for hotels, but the same is for airlines or anything,” Welch said.
Lionel Benjamin, CEO of Gullwing Hospitality, warned of the consequences of too much government intervention.
“All must remember there is a payback time. What is the consequence of (government help)? Higher taxes? Hotels in default, and banks with portfolio of hotels they do not know what to do with?” Benjamin asked.
Some or all of this is possible for existing clients.
Benjamin said it is not a good time to be a new borrower.
“Banks do not have time to get into new relationships, but banks have to show borrowers they are there for them, to be loyal to loyal customers, and not go back to when businesses were defaulting and banks had to take back assets,” he said. “Banks should be more flexible on covenant terms, to keep assets in the hands of those whose day job it is.”
“Banks do not want to be hotel owners,” Scott added.
Welch agreed, but said there needs to be a business case for banks to act.
“Some weaker operators will go to the wall, and those better financed will take advantage,” he said.
But are properties in larger markets poised for more aid?
“And when banks say they are open, I ask myself if this is just for a hotel in London,” Benjamin said.
Lending and leases
Banks and their money are starting to look at hotelier innovation, which leads to more revenue, panelists said.
“Working from home must be turned into working from hotels,” Benjamin said. “CitizenM is leading that chance, and we can learn from their innovation to try and attract people back in. Perhaps via a subscription model.”
Gullwing is in talks with Accor and the Travelodge Owners Action Group over the possibility of starting a new platform called AGO with Travelodge (U.K.) landlords who have the option of breaking their contracts with Travelodge.
“One hundred leases will not be the way forward, unless you are Premier Inn,” Benjamin said. “There are fewer people out there that can stand fully behind that model, and there is more realism banks should adopt this: a blend with a fixed base that can be looked at as ground rent and is a low portion of (earnings before interest, tax, depreciation and amortization). This is more sustainable.”
Scott said serviced apartments and other alternative accommodations have the banks’ attention, too.
COVID-19 is an opportune time for such innovative thinking, Welch said.
“I have never just looked at rent, but always have an eye on underlying trading and a view on whether an asset is over- or under-rented, although with Travelodge, getting behind the numbers is a little more difficult,” he said.
Panelists said transparency and alignment are key.
“You have always needed a solid front and trading history of a property when you come to banks, not just during operations but when it comes to the sale,” Benjamin said.
Benjamin added private debt is more expensive but has proved itself to be viable.
“(Private debt) it is more flexible, and today again we need to be more creative as retail banks cannot serve everything that comes to them,” he said.
“They are partners in the capital stack. (Traditional) banks can go to some level, equity also can do so, but there is a gap,” Welch said.