In the first instalment of this two-part series, we looked at the challenges faced by hotel owners and their lenders when dealing with defaults in their financing arrangements due to the closure of the sector.
In Part 2, we're going to explore some of the financial support options available to hotel owners, and review the many social distancing-related operational changes being considered by hotels prior to re-opening. The costs of these operational changes will impact profitability and therefore the ability of borrowers to service their debt obligations to lenders.
Business support loans
In assessing the extent of capital available to meet their financial obligations, hotel owners will be keen to utilise any external support available. The UK government has so far announced a number of loan schemes to support businesses experiencing lost or deferred revenues leading to disruptions in their cash flow. These include:
- the COVID Corporate Financing Facility (CCFF): designed for large, established, credit worthy corporates looking to raise a significant amount of short term liquidity
- the Coronavirus Large Business Interruption Loan Scheme (CLBILS+): designed for UK businesses with an annual turnover above £45m
- the Coronavirus Business Interruption Loan Scheme (CBILS): designed for UK-based SMEs with group turnover of no more than £45m per annum looking to raise up to £5m
- the Bounce Back Loan Scheme: designed for small businesses to provide rapid access to loans to help them survive the pandemic crisis.
More detailed guidance on the schemes listed above is available here.
Businesses have reported challenges in accessing support schemes given the large influx of applications in a short timeframe, the challenges in lenders conducting appropriate underwriting checks, and issues in interpreting the eligibility criteria in the context of real estate finance structures.
Furthermore, hotel owners may have found themselves ineligible for these schemes due to the turnover of their wider sponsor group being taken into account, which may take them over the turnover thresholds. Where a hotel is subject to high leverage, hotel owners have also faced challenges due to the EU State Aid testing on financial difficulty where accumulated losses are not to exceed 50% of their share capital.
In cases where a hotel owner is seeking a support loan from a lender who is not the lender that financed the hotel (and took security over it), there are also challenges over how to introduce the support loans into the existing structure. This may require consent of the pre-existing lender depending on which group entity is to be the borrower of the support loan.
Hotels 2.0 – a changed industry?
While all businesses are formulating return to work plans, the extent of the practical challenges involved in re-opening hotels in particular should not be underestimated.
Hotel owners will be focussed on formulating changes to their businesses designed to demonstrate that sufficient social distancing measures are now embedded in the core of the hotel offering.
At the same time, lenders will be conducting a more intensive "deep dive" to assess the viability of hotel businesses as they engage with borrowers to consider the extent of future loan default waivers or relaxation of loan covenants.
The extent to which new business plans now need to provide for additional capital expenditure to implement the requisite changes to hotels will feature in these considerations for borrowers and lenders alike.
Notwithstanding that the summer is likely to involve extremely muted levels of occupancy, confidence-building through clear and demonstrable changes to a hotel's offering will be key. These are likely to include:
- Staffing – While the government's furlough scheme has been extensively utilised, the re-introduction of staff will remain directly linked to the increase in hotel operations and revenue. Until operations fully resume, a lower staffing level is likely to be required, and will also involve staff being asked to assume a range of different responsibilities at a hotel to fill gaps in service delivery as they arise. Expect a longer wait for your afternoon beverage.
- Site changes – Clear signage outlining social distancing requirements along with (if possible) a "one-way" flow of footfall will be key. Existing lobby furniture may be jettisoned to free up more space, particularly given anticipated restrictions on the use of lifts. Expect to take longer to get to your room.
- Cleaning – The frequency, depth, and visibility of a regular cleaning and sanitising regime will be paramount, and many operators have already announced substantial changes in this area (for example, the introduction of electrostatic sprayers to sanitise surfaces in rooms as well as in common areas). Expect to bump into hygiene stations.
- Food and beverage – The rate at which occupancy and staffing levels recover will dictate the extent to which the usual variety of options on (disposal/wipeable) menus are available, and there will also be fewer tables in dining rooms. Expect to book in advance for dinner.
- Spa/gym amenities – Much reduced capacity limits and a greater need for advanced bookings may be offset by the initial lower occupancy levels but government guidelines will no-doubt be particularly specific in this area. Expect to stay in your own (swimming pool) lane.
- Training – The extent of the new landscape will necessitate a great deal of additional staff training. Expect to bear with staff during some occasional blips in service delivery.
Hotels which are particularly reliant on revenue streams from food and beverage and conferences and events will effectively be formulating an entirely new (and untested) business plan which lenders will be cautious to lend against.
In terms of re-engineering hotel operations, this will obviously require additional expenditure in an environment where considerable revenue has already been lost and future projections of revenues remain uncertain at best. This will involve negotiations with franchisors/brands as to the required expenditure and the concerns of brands to ensure hotels are reflecting a new standard of operation.
In some instances, available FF&E reserves may be repurposed to meet these additional costs which may require the consent of all stakeholders depending on the existing documentation.
The road ahead
Much has been written about the likely increase of working from home across many office-based businesses and the resulting decrease in office space requirements.
However, the ability for co-workers to meet in person, hold team-building events and maintain any sort of team culture means that there will remain a need to hold physical gatherings to keep an organisation together. Hotels remain well placed to service this need, and a re-imagined conference and event offering from hotels should be a key component of any revised offering.
It may still be a bumpy ride, but if lenders and borrowers continue in the spirit of collaboration, the path to recovery and profitability will be found, provided they don't miss the ramp up ahead.
