COVID-19

Independent hotels at ‘risk’, says Fitch

Fitch Ratings said that there might be opportunities for consolidation in the sector if smaller operators could not get over “liquidity tensions”.

Looking at the branded operators, the agency said that Radisson was most likely to need additional liquidity support in the coming months.

The agency said that independent hoteliers  who  did  not  have  a  portfolio  large  enough  to optimise their  occupancy  rate  ran  the  risk  of  staying  below break-even  levels for  a  longer  period.

It said: “Investment-grade     names,    such    as    Accor or Whitbread, show   better   resiliency   against   this disturbance, which    does    not   constitute   a   driver   of   structural change   for   credit   profiles. We   also   foresee   liquidity  to  remain comfortable, as expected for an investment-grade credit.

“However, a   delay   of   deleveraging, along   with   the   uncertainty around  the  recovery  path, explains the negative outlooks. This  deterioration  of  deleveraging  capacity  is more  acute  in  the non-investment-grade   categories,   where   most companies’ credit metrics are not  back  within  their  guidelines  by  2022, leading  to  rating downgrades.

“Radisson has a  tighter  liquidity position   than  the  rest  of  the  portfolio, which  explains  its Rating Watch Negative. According   to   our   monthly   forecast, the   hotel   company may   need to   be supported in  the  coming  months  with  additional  funds. On  29  May 2020, Radisson  announced  that  its  main  shareholder,  a  consortium led  by Jinjiang  International,   would contribute  €200m under  the form  of subordinated debt.”

On 8 June the company updated the market, commenting that it was taking advantage of  the low activity period to push forward strategic repositioning and development projects. At the end of May, more than 50% of the group’s hotels across EMEA were temporarily closed.

The group said NH  Hotel’s liquidity was not  as  pressured  as Radisson’s, despite the group being at the same rating  level on  a  standalone  basis  and having  a free  cash  flow that was  “not    as    robust   as previously predicted”. Liquidity   has   been reinforced  with a €225m  syndicated loan  signed  in  May . In  the  case  of Alpha  Group, which  owns A&O Hotels     and     Hostels,    the    liquidity    cushion    was    more    limited considering   that   their   peak   season   takes   place   in spring with school   groups. Nonetheless, Fitch said that the   coupon   payment   was   achievable with the current   cash   position  and  the  revolving  credit  facility, which  was  fully  drawn  and  expected  to  allow  the  company  to  cover operational  needs in  2020.

Looking to the wider performance of the sector, Fitch said that it expected  the coronavirus pandemic  to  cause  more  than  a  60%  drop in  2020 for European revpar,  which  would not  recover  until at  least  2023,  unlike  previous  crises  such  as  Sars or  swine  flu, where  hotel occupancies  bounced  back  to  pre-crisis  levels  within less than two  years.

STR reported that, as at 30 April, 76% of hotels were closed in Europe and 17% in North America. The rolling 28 days occupancy to 16 May illustrated there was some recovery in China and in the US in the Central South and West parts, but not in Europe. China was at 43.5%, with the US at 32.4% and Europe at 11.7%.

Robin Rossmann, managing director, STR, said: “One of the reasons that Europe has struggled more is that it has seen stricter shutdowns than the US. It is more exposed and we should be more careful. Has the recovery in Europe started? Not yet. The occupancy in hotels open in April was ranging between horrible and terrible and worse. But there is light at the end of the tunnel, I think demand will come back in June, with domestic travel.”

For the weekly rolling seven days to 6th May no European cities showed occupancy growth. As for business on the books, there were very subdued levels of demand, 10% rooms sold or less for the next 90 days, but booking cancellations had slowed - because, Rossmann said: “there’s, not much left to cancel”.

Insight: Europe is particularly hopeful this week and who are we to rain on any parades? The EU is planning to open borders, the airlines are gradually getting back into the air, there is the potential for people to have an actual summer, maybe followed by some actual business meetings, with  Kempinski illustrating how it can host hybrid events complete with themed lunches.

But, as Rossmann noted recently, ‘recovery’ doesn’t mean what you think it means, it just means moving off the bottom. A return to the revpar of 2019 is years off. The ‘planes were heading up, but, as Ryanair noted last week, prices would be depressed as airlines battled it out for travellers. The same will be true for hotels and now, we suspect, is when distress will start to be felt.

So back to our favourite game: who will buy whom? We still favour Accor for buying someone - Radisson, for that northern European flavour? And Hyatt is sniffing around, could it scoop up NH after losing out to Minor? And will Whitbread use the money it secured last week to buy a group, not just picking up sites piecemeal? So far there’s plenty of chat on the sidelines but no deals poking above the surface. That’s likely to change soon.