With cashflow becoming an increasingly critical issue for hotel owners during the pandemic, the ability for owners to raise new debt or equity is a key issue.
Many hotels owners have accessed additional capital using the Government backed lending schemes (loans of up to £5m under the Coronavirus Business Interruption Loan Scheme (CBILS) for companies with a turnover of £45m or less or up to £200m for larger companies under the Coronavirus Large Business Interruption Loan Scheme (CLBILS)).
Those unable to access those schemes however facing more expensive debt or the prospect of not being able to raise additional debt at all.
James Salford, real estate finance partner, Bird & Bird, told us: “Lenders have been fantastic supporting the industry through the pandemic, but inevitably some owners will fall through the net. If you want to borrow £2m to £3m to tide you over in terms of cashflow, you have CBILS and a number of banks who are not CBILS approved lenders have been providing working capital facilities to help businesses get through the crisis. The CBILS loans are available and, for hotel owners who are banking with a CBILS lender, that’s fine, because often they are topping up what’s already lent. The challenge for some hotel owners is if yourmain hotel facility is not with a CBILS lender or a supportive bank, it will be much harder to access additional debt. If your facility is with a debt fund or alternative lender any additional funding will need to meet the lending criteria of the existing fund which will have limits on the amount they can lend and higher pricing requirements. The banks were lending at conservative levels, pre-crisis, but the debt funds were lending at more aggressive levels, so when you’re asking for more money, it can less comfortable if you were already highly geared.”
Salford acted for Santander, which recently entered into a revolving facility agreement with PPHE Hotel Group to provide a facility of up to £30m, in accordance with the CLBILS Scheme. The facility was provided on a three-year term, with an interest rate on drawn amounts of LIBOR plus 2.5% during year one, increasing to LIBOR plus 3% in years two and three. The facility will be used to support trading of the group in the UK during, PPHE said, “this unprecedented time”.
Salford added: “There has obviously been a very limited amount of activity in terms of buying and selling of hotels this year, but as we go into 2021 I suspect we will see more assets come to market. There are still plenty of investors keen to acquire hotels in good locations. The challenge for buyers (and existing owners) will be to secure senior debt. If you want to borrow from one of the main UKclearers at the moment, it will be challenging unless you’re an existing customer with a good track record and even then it’s going to be at much lower levels of gearing and a higher pricing than has gone before.
"There are a group of lenders that are very active at the moment, lending on new deals - the challenger banks, banks like Bank Leumi. They see that now is the time to build a book, to build relationships with new customers. So they are lending to quality people, either to refinance or do acquisitions. But clearly they have limited lending capacity and a limited number of people and the problem is that people in the sector know they’re open and they’re seeing all the deals in the market - they can’t do 30 deals a week. If you go up the scale to the debt funds and the alternative lenders, they have plenty of money to lend, particularly if you want mezzanine finance or whole debt solutions, but inevitably it’s more expensive. Two years pre-crisis you had senior debt margins of - generically – between 185bps and 285bps. Those margins are now 350bps+. It’s still cheap if you look at it historically, it’s just not comparatively cheap. If you go up to the debt funds, you’re looking at a blended margin of at least 4.5%, maybe more although the gearing will be higher.”
Insight: News of a vaccine - now two - has sparked hope of an end to the pandemic and a roaring return to travel and people ramming themselves into hotels. Roll up, roll up, see the revpar rise.
The issue is getting there. A vaccine may unleash the full force of travel, but will be many months in the delivery and until then, travel will be reliant on the organisational capacity of government to bring in effective testing and tracing.
In the meantime, hotels are - hopefully - soon to see a lifting of restrictions in the UK, but will be coming out of a second lockdown, during which they were allowed to trade under certain circumstances, but none of them enough to fill a property. The strain has increased over the parlous months and, for those without access to affordable lending, making it to the vaccine finish line will be a push.