Resetting the hotel balance sheet to be fit for recovery was the theme of the latest conference organised by global hotel consultancy HVS, legal expert Bird & Bird, publishing group EP Business in Hospitality and restructuring advisory firm AlixPartners.
Addressing both in-person and online delegates, Graeme Smith, EMEA head of hospitality & leisure at AlixPartners considered the support received by hotels from lenders, resulting in limited restructuring activity, despite the disruption that the pandemic caused.
“There are now a number of different lenders, the landscape is more diversified so the ability to absorb shocks in the system is much greater,” he said. The sector is now operating on a lower loan-to-value basis and the pandemic caused an issue with the supply side. “Financial shareholders stood still,” he said. “They held on and provided support, which was the right thing to do.”
However, as we enter the recovery phase the current standstill consensus runs the risk of falling away and leveraged covenants will begin to be tested again which may trigger refinancing, restructuring or disposal processes. As the coming winter is likely to prove tough, Smith advised operators to actively engage with financial stakeholders to maintain support, be realistic about their outlook, plan accordingly and take early action to renegotiate terms or explore funding options if necessary.
James Salford of Bird & Bird said that while hotel values had held up, market outlook was more difficult to call as technology had changed the way people do business. “Staycations have driven performance in the domestic leisure market whilst luxury city centre, conference and airport hotels have struggled,” he said, adding that while some banks were still actively lending to hotels, this was in significantly smaller numbers than before the pandemic – although debt funds and alternative lenders were active together with an increase in the availability of mezzanine financing.
“The shift from banks to alternative lenders has been happening for a while, but has accelerated due to Covid. This is likely to be a permanent change with pricing becoming more competitive. Development finance will be difficult for the foreseeable future,” he added.
A lively Q&A session, moderated by HVS chairman Russell Kett, addressed factors likely to hamper recovery progress. “The challenge around financial forecasting particularly if you have London hotels, as well as the pace of the change – when will it come back and how will it come back,” was a key issue for Arron Taggart of Cheyne Capital, with travel restrictions, lack of airlift and scarcity of MICE business highlighted by Jan-Willem Terlouw of Westmont Group.
Edwardian Hotels’ Peter Anscomb said the difficulty was the inability to predict hotel performance, which was “purely down to what the restrictions allow”.
Environmental, social and corporate governance [ESG] has become a growing issue, said panellists. “We are being pushed incredibly hard on ESG now,” said Taggart. “One of the key challenges is whether corporate travel will come back; if it does, it’s not going to be as before as it’s not consistent with ESG policies.”
Barclays Bank’s Tim Helliwell, citing recent research, said that Generation Z will pay a 30% premium for ESG. The panellists predicted a time that lenders wouldn’t lend to businesses that weren’t carbon neutral.
Whether or not branded hotels were in a better position going forward was also under debate, with some panellists arguing that assets and location had become more important than brand values.
“Flexibility is now very important and brands can be very restrictive,” commented Louise Gillon of Bank Leumi. She advised operators to be clear about their core business and to be realistic about what you can achieve over the next four to five years.”