There are varying opinions on what the actual outlook for the hotel sector will be for the remainder of the year and beyond. However, the reality is the future for the industry is unknown. One thing is certain - with reduced volumes of overseas visitor numbers and low demand for the traditional “ground floor” hotel facilities (conference, event and meeting space, leisure, food and beverage services), hotels are likely to be operating at significantly below normal trading levels for the foreseeable future. This will have serious implications in terms of hotel revenues and as a consequence hotel values.
For any business, a revenue problem can translate into a debt problem.
For the hotel sector, this means that many are facing into a scenario whereby they may not be capable of generating sufficient funds to service debt or meet current financial obligations and therefore will need to take some form of corrective action. Many hotel and other accommodation providers have made significant capital investment into new build, extension and refurbishments over the past five years with much of this investment funded through borrowings.
Since the onset of the crisis we have seen many of our hotel client’s take proactive action to address the challenges facing their business. Costs have been cut, staff have been furloughed or placed on the TWSS, loan repayment breaks have been utilised and all non-essential outgoings curtailed. However, on the assumption that COVID-19 will remain a feature of life in the short to medium term, we believe that hotels will increasingly have to work with their lenders/ funders to create a more permanent solution to the problem. As loan repayment breaks come to an end, hotel operators should be proactive when preparing to negotiate with their lenders.
So what should you, as a hotel owner, do if you have too much debt on your hotel or are unable to meet your current obligations to your bank or lender?
Don’t ignore the problem - We have seen far too many hoteliers exhaust all other sources of cash before they meaningfully engage with their bank. By engaging early with your bank, you will be better placed to preserve any cash left in the business and which will be increasingly difficult to accumulate. Speak to your bank as soon as you can. It is in all parties’ interests to find a negotiated solution.
Be open and transparent - The success of any restructure negotiation will be dependent, in part, on the borrowers’ credibility and the trust between the lender and the borrower. Be sure that the financial and other information presented to the bank is complete and accurate. When preparing financial projections provide a realistic, optimistic and pessimistic scenario. If your lender begins to believe that they cannot rely on what you are telling them, then your ability to reach an acceptable solution will quickly diminish.
Be proactive with your lender - Don’t wait for your bank to come to you to tell you there is a problem; you need to come to them with a solution. A debt restructure or re-financing is often in the best interests of the lender and borrowers. If properly structured, it can yield the lender more money than a receivership scenario and be accomplished more quickly with less legal involvement and associated expense. For the borrower, it will mean a more sustainable repayment structure allowing more cash to be used towards operating expenses.
As we witnessed during the last economic crisis, ‘fire’ or ‘distressed’ sales of hotels tend to result in significant losses for both the original owner and lender.
Don’t forget the need for future capital investment - Too often, when preparing forecasts and restructuring proposals, borrowers tend to forget that there needs to be enough cash flow after the debt restructure to fund the inevitable capital reinvestment needed for the business to remain competitive now and into the future. It is important to include a level of capital reserve to allow you to continue to maintain and improve your hotel.
It is inevitable, particularly while COVID-19 remains, that debt restructuring will once again become a feature of the Irish hotel market. Properties with high debt relative to their competitors will find it increasingly difficult to operate and remain competitive. Unfortunately for some, debt reduction only arises as a result of enforcement action on the part of a bank or lender, by which stage it will result in a loss of control by the business/ property owner.
By being proactive and tackling the problem head on, the best result for the property owner and the lender can be achieved through a formal negotiated process.
BDO’s Tourism, Hospitality & Leisure sector experts are available to support you and your business through these challenging times as you seek to reboot, stabilise and improve your business resilience. We offer independent and pragmatic advice on all aspects of debt funding for hotels, bars, restaurants, visitor attractions and other leisure businesses.
We will advise you in developing a strategy to deal with your current debt obligations, assist in sourcing new finance or re-finance your debt with a new lender, where appropriate.
To find out more, contact our specialist Tourism, Hospitality and Leisure Debt Advisory Team: