GLOBAL REPORT—The advice and help hoteliers can seek with loans and debt varies on both sides of the Atlantic, according to experts based in the U.S. and the United Kingdom.
Speaking during the virtual Hotel Revenue Optimization Conference on 9 June, Joe Iacono, CEO and managing partner of Crescit Capital Strategies, said financing during the COVID-19 crisis was extremely challenging for lenders.
“Simply, they are trying to determine how to underwrite. There is less capital than there was. Private lenders, some operating with leverage, perhaps also themselves borrowing from banks, no longer are lending. Their ability to access capital has become more difficult, so that has left (borrowers) with banks and insurance companies, which have become more conservative,” Iacono said, noting his firm has been both a borrower and a lender.
He added there are opportunistic lenders, but fewer than before.
“If you are a borrower with capital from a traditional lender, then you will be having genuine conversations about your property, but right now (commercial mortgage-backed securities are) a different experience. The sheer weight of requests coming in (on CMBS) is daunting. I spoke to one very large special servicer right at the beginning, and they had two people working, so clearly there’s a problem,” Iacono said.
Jeff Diener, partner, real estate, at legal firm DLA Piper, said many borrowers with sub-$100 million loans are having a problem getting through to their special servicers, even if their loans are performing.
“A lot of those loans are held by frustrated people who do not know what to do,” said Mark Kerrutt, VP of hospitality at Ascentium Capital.
In the U.K., CMBS is a relatively small part of the financing picture, said Tim Helliwell, head of hotel finance at Barclays Bank.
“In most cases, it is bank-loan led. We are starting to see distress in Europe, but we are not at the point of seeing volumes, as I hear is happening in the (U.S.),” he said.
He said modifications such as “waivers, resets and liquidity asks” have been typical.
“So far at least, March through end of May, (distress) is more predominately at the edge, rather than front and central. That does not mean it is not coming. We are dealing with … liquidity and documentation situations,” Helliwell said.
Frank Croston, founding partner of Hamilton Hotel Partners, said distress is being kicked down the road in the U.K., with the government encouraging banks to defer debt. He said that can only work if deferrals are forgiven for at least five quarters. Otherwise debt still would be included in results for the same calendar year as the steep decline in revenue stemming from COVID-19.
He added U.K. government help has come from deferrals of corporation tax to April 2021 and value-added/sales taxes for 12 months.
“Those are sizeable liquidity benefits, but as that unwinds, and as banks will want greater servicing of their loans, that is where the liquidity crunch will manifest itself and become a distress crunch,” Croston said.
Multiple voices
Iacono said another issue is that changes to any loan require multiple decision-makers.
“There could be multiple loans across several transactions governed by different documents that limit what different parties can do. CMBS is not equipped to deal with this type of crisis,” he said.
U.S. sources said deferring on payments is one way of getting attention, but most definitely the worst method.
“It would get the special servicer’s attention, but you would get special-servicer fees, which can be extensive … maybe 1% charge going in and also coming out, and then likely 25 basis points annually on the full value of the loan. These fees are borne by borrowers,” he said.
Iacono and Kerrutt said borrowers should first seek advice.
“This is not a 60- to 90-day problem for hotels; it is longer. Avoid that trigger as long as you can,” Kerrutt said.
Helliwell said options in the U.K. include coronavirus business-interruption loans for those with £45 million ($57.3 million) annually in revenue and SME loans of £5 million ($6.4 million) for up to six years, 80% of which is guaranteed.
“There are also no restrictions as to how those loans are used, but the main difference is the scheme is a loan, and there is no conversion to a grant if something (during this time) transpires. Frankly, they have to pay it back within the time restraints agreed,” he said.
He added there are also investment-grade loans, likely accessible to only around 50 to 60 companies, but that overall the options available have been successful.
Opening differently
More pressure comes from hoteliers not being sure when they can reopen their properties, speakers said.
“In Europe, most countries are on the re-opening journey,” said Croston, whose company has a mostly U.K. portfolio. He said his Bollants Spa Im Park in Germany is 100% occupied on weekends, and at 50% during the week.
“Now the key issue is travel and flight lift to get non-domestic travel flowing across Europe,” he said.
Kerrutt said now is the time to look at new debt.
“If you can borrow money, you should do it so when things reopen, you are ready to open,” he said, before adding that it is a challenge to find construction workers.
Croston said, “The real issue is trying to forecast future earnings and the slope of recovery.”
“All the conversations now are being driven by how bad it might get. We believe it will be the end of 2022 to get anywhere like approaching 2019 levels, and 2023 to exceed them. (The U.K. is) not collectively seeing a V-shaped recovery,” he said.
Iacono said for U.S. convention hotels, that time span is more like five years.
“In terms of underwriting, we’re looking back to 2013-ish levels of (revenue per available room), and as more capital comes in they will be looking at those levels, and getting more aggressive over time,” he said.
Helliwell said the big challenge will be the tail end of the recovery.
“That will impact (firms’) downside liquidity forecasts,” he said.
Iacono said his biggest worry is for mid-market borrowers.
“Institutional investors will be fine, but coming into the fourth quarter, lenders without a window of help will have to take properties back, and borrowers will be forced to hand keys back,” he said.