COVID-19 Impact in Hospitality Financing and the Current Climate for Borrower’s and Lender’s in the Hotel Industry
By Korosh Farazad, Founder and Chairman of Farazad Group of Companies
Due to the recent unprecedented event, the hospitality industry along with all other industries around the world has been damaged by COVID-19. Which results in a world economic crisis with domestic & international travels rapidly slowing, occupancy falling and hotels closing.
According to Savills, in March 2020, hotel occupancy across Dublin has declined by more than 90%. Savills has lowered its anticipated supply of new hotel bedrooms from March 2020 to the end of 2022, in Dublin by 32% (approximately 4,000 bedrooms), with over half of those expected in 2021. Tom Barrett, Director of Hotels at Savills Ireland has stated that "Just a few weeks ago, before the current restrictions, Savills visited Dublin hotel construction sites to observe physical progress. Based on these visits - and our own analysis - we expect hoteliers, developers and investors will complete most projects that have commenced construction, although the delivery and opening dates will slip."
The occupancy rate continues to drop rapidly worldwide. Consumers are not looking to book new trips or travel in the next few months, leading to more cancellation rather than reservation. The figure below shows the occupancy % change between 2019 and 2020, the week ending 22 March.
Next several questions are, what is the impact of COVID-19 on hotel loans? What are lenders, borrowers, and hotel owners currently facing? Since a number of business sectors including retail, aviation, travel, hospitality and tourism have seen hugely reduced cash flow due to the impact of the COVID-19 pandemic. There is no doubt that both lenders and borrowers should review the loans that they have in place. Here below are the options each party can do:
- Working Capital/RCF Facilities - revolving credit facility will often state that in the event of default or a potential default a borrower is prevented from borrowing further advances. However, a lender should always think carefully about invoking such a right as this will undoubtedly create a serious impact on the cash flow of the borrower! This may therefore actually mean that the borrower is less able to repay its outstanding debt.
- Financial Covenants - Financial covenants act as an early warning system by highlighting when a borrower is likely to be unable to meet its payment obligations.
- Repayment - The impact of COVID-19 on a businesses' financial performance means that it could hinder its ability to meet its repayment obligations under a loan agreement. Again, a borrower should always be aware of when it is due to make a repayment and if it has concerns, it should enter into early negotiations with its lender to defer scheduled payments, reduce the repayment amount or, in more extreme circumstances, look to restructure its entire debt.
- Negotiations - with creditors in relation to actual or anticipated financial difficulty - lenders and borrowers should consider the impact of entering into negotiations in relation to actual or anticipated financial difficulty of the borrower. The borrower can ask the lender to modify loan terms and defer payments.
- More Development Loan on Existing or New Hotel Projects - When the crisis ends, the hospitality industry should ramp back up fairly quickly. Experts suggest that now is a good opportunity for investors to finance the development of a new hotel or to acquire an existing one due to the rare low-Interest rates. For Instance, Bank of England cut interest rates to 0.1% to help firms in business and people in jobs and prevent COVID-19 from causing long-lasting economic harm.
Furthermore, the below are discussion on do's related to managing loan. Things a lender should consider managing situation during this pandemic crisis are as follows:
- Review agreements to understand the rights and obligations of each party
- Determine who controls the action on the lender's side: What is the relative priority of the lender's lien? Review subordination agreements/inter-creditor agreements, if any.
- Consider potential lender liability issues
- How long will different options (judicial/non-judicial) take
- Determine if the borrower should remain in control of the property
- Does it make sense to engage turnaround consultant or another hotel consultant
- Determine if there are any property specific issues to consider in deciding whether to restructure loan/agree to work out or foreclose
- Ability to reject executory contracts including management/franchise agreements
The situation is difficult for everyone in the world since cash flow is limited in every business sector. Therefore, during this time, hotel lenders and borrowers should be proactive and follow the hospitality trend and performance, keep monitoring how banks are responding, legal analysis of hotel loans in distress and follow the suggested guidelines on the above statements to manage loans properly and to avoid any default.
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