If you had shares in Marriott International, or are someone who doesn’t want their nearest and dearest to die on a ventilator, this week was a very good week for you. It was an excellent week for Pfizer of course and a terrible week for Donald Trump, who could have used the news of a good trial result a little earlier. For most of us it was pitched in between.
So spare a thought for those poor private equity houses, possibly even sadder than the don’t-leave-your-packing-until-the-last-minute president, who are now fretting over the lack of destruction they were anticipating in the market. Is this news enough to convince the banks to keep on pretending and extending until the new year? Easter? Next summer? Or are the discounts the vultures hoped for still on the horizon?
Earlier this month, Jim Risoleo, president & CEO, Host Hotels & Resorts drew attention to the reality that: “A record 26% of CMBS hotel loans were in special servicing in September 2020 compared with 1.9% in December 2019. And 70% of hotel loans are either in special servicing or on special servicing watchlist according to TREPP Research. Delinquency rates are expected to move higher as forbearance agreements start to roll-off. Additionally, some hotel owners who were hoping for a speedy recovery may not be able to sustain the cash outflows required to service their indebtedness and may decide to throw in the towel.”
And that towel is, our PE friends may be relieved to hear, being thrown in all over the place. The eager investor need not even make their way in via debt: in the UK, a number of portfolios, long mooted for sale, are now coming to market, while anyone with a taste for luxury would be well placed to get over to Paris for a veritable pick’n’mix.
For Benjamin Habbel, Limestone Capital’s managing partner and co-founder, the vaccine was no deterrent to distress at all, telling us that he saw it “every day”. He added: “I don’t think that the arrival of the vaccine takes away the opportunity whatsoever, if anything it encourages investors to take chances now that there’s a small light at the end of the tunnel. We had factored in from day one that there would be many treatments. If sellers want to sell they will sell and those who can hold will hold.”
It is this chance taking which we started to see this week, with news that the PE groups who had been holding out for the first half of next year were starting to get a shift on and hiring to get in while the going was bad.
Habbel said: “There are a lot of reasons why companies or projects become distressed, the ones we try to focus on are properties that have very robust, very strong real estate value but, for whatever reason, were mispositioned in the market, were not run correctly, or managed for the right purpose. They have been positioned away from demand, or had a lack of investment over a long period of time so that demand fell away. All of these shortcomings can come together very quickly.”
Up to this point, regular readers might be looking for the nearest pitchfork and wondering about the fast train to this hack’s abode, but this is a tale of hope, no matter what the early signs and not just hope that, even if this vaccine falls by the wayside, another will be along in a minute.
This is hope that, for those who can show their banks that there is an exit, pretend and extend will continue to do its job as the lending strategy of our times and those who fall by the wayside are those identified by Habbel, for whom the pandemic is the final straw. Whitbread announced at the end of the week that it was pulling back on the number of job cuts it expected to make. Bad, but not as bad as it could have been. The hope is that this is the theme across the market.